Is Alcoa a Takeover Target?
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With Rio Tinto (NYSE: RIO) taking over Alcan earlier this year, there is speculation that Alcoa (NYSE: AA) will be acquired by a company seeking to augment its weakness in the aluminum sector, such as BHP Billiton (NYSE: BHP) or Freeport McMoran (NYSE: FCX).
BHP Billiton, based in Austrailia, is the world's largest mining company. But BHP Billiton is weak in the aluminum trade, vital for making automobiles among other products. China is both the biggest customer of BHP Billiton and the biggest importer of aluminum in the world.
BHP Billiton has been very active in acquiring companies to fill out its roster. Last year, BHP Billiton bought PetroHawk, a a natural gas concern in Texas, for $12.1 billion, more than a 60% premium. To say that BHP Billiton bought at the top of the market and overpaid would be a mild understatement, to say the least. That certainly has not helped the stock performance of BHP Billiton, which is down almost 30% for the last year of trading.
Freeport-McMoran Copper Gold is strong in both copper and gold. Like BHP Billiton, the last 52 weeks have not been kind to those holding a long position as the share price is off by nearly 40%. The past week of trading has witnessed another 4.18% decline. China is the world's biggest consumer of copper and with growth falling, so is its demand for the Red Metal. Hence, the nosedive for Freeport-McMoran stock.
Alcoa is the world's largest primary producer of primary aluminum. Based in Pittsburgh, it is a member of the Dow Jones Industrial Average. Alcoa is certainly priced right for an acquisition at this time, and most likely will remain so for quite some time. Over the last year of market action, Alcoa has fallen by more than 45%. This trend continues: for the last week of trading, Alcoa is down another 4.91%. Alcoa is very close to its 52-week low.
Both BHP Billiton and Freeport-McMoran need Alcoa for the same reason: to please the biggest customer, China. The more offered from one entity to China in industrial materials and metals, the better for obtaining that and other business. Both Freeport-McMoran and BHP Billiton need a formidable aluminum presence to aggrandize the appeal to Chinese customers.
In terms of being attractive, Alcoa is the cheapest it has been in a long time. At $8.23, Alcoa is not that far off from its ten-year low of around $6.30 in early 2009, the nadir of The Great Recession. In May 2008, Alcoa was well over $40. The forward price-to-earnings ratio for Alcoa is 10.82.
While the share prices of BHP Billiton and Freeport-McMoran have been weak, there is a great deal of strength showing on both the income statement and balance sheet of each. For BHP Billiton, earnings-per-share growth is up by 87.42% this year. The profit margin for BHP Billiton is 31.05% and the return-on-equity (ROE) is robust at 38.59%. The price-to-earnings growth ratio is a very bullish 0.68.
Freeport-McMoran has robust financials, too. The profit margin is 24.64%. Next year, earnings-per-share growth is projected to increase by 32.53%. The ROE for Freeport-McMoran is 25.55%.
It is a long established practice in the petroleum industry to buy companies with oil reserves that make the acquisition cheaper than having to explore, then drill for and produce the crude. With a price-to-book ratio of 0.65 and price-to-sales ratio of 0.36, Alcoa is at that point where it is an attractive takeover target. Alcan cost Rio Tinto $38.1 billion. The market cap for Alcoa is around $8.9 billion. The math works for both BHP Billiton and Freeport-McMoran.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.