This Materials Giant Continues Its Long Climb Back

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Aluminum is a basic material that is a necessary input in our society. Since aluminum goes into everything from homes to soda cans, the underlying stocks are tied to the health of the global economy -- for better or for worse. During the depths of the financial crisis, demand for those types of products dried up, and the financial fortunes of companies like Alcoa (NYSE: AA) followed suit.

Investors have eagerly awaited any good news they can get their hands on from the global aluminum giant. In the wake of its second quarter earnings report, did investors finally get what they needed from Alcoa? Or should investors avoid the aluminum industry entirely?

Signs of recovery

There were some undeniable positives in Alcoa’s report. The company was free cash flow positive in the second quarter, and reduced its debt by more than half a billion dollars, leaving the company with $1.2 billion in cash on its balance sheet.

Moreover, Alcoa's management is optimistic about the rest of the year and the future for aluminum. The company expects 7% growth in global aluminum demand for the full year, and Chief Executive Officer Klaus Kleinfeld was quick to reiterate the company’s improvements. He added that he expects global aluminum prices to be at or near a bottom.

At the same time, undeniable headwinds still exist. Alcoa’s total sales dipped 2% year over year, and the company reported a net loss. However, if you exclude special items, the company managed a profit of $0.07 per share.

Alcoa certainly isn’t the only global aluminum producer having a difficult time emerging from the devastating effects of the Great Recession. International competitor Aluminum Corporation of China (NYSE: ACH) holds a market capitalization of just over $4 billion, about half of Alcoa’s market value.

Since the company is based in China, you’d likely assume the stock would be a great choice for investors looking to capitalize on emerging market growth. However, Aluminum Corporation of China has gotten crushed since the beginning of 2013.

Aluminum Corporation of China’s share price has fallen roughly 35% just since the start of the year, indicative of the struggles facing the aluminum industry. Not surprisingly, the company reported a net loss in the first quarter and negative return on assets through the first three months of the year.

Smaller domestic industry player Century Aluminum Company (NASDAQ: CENX) has yet to report its second quarter results, but its first quarter results confirm the struggles facing the aluminum industry.

The company’s sales fell 1.5% year over year, and its net loss clocked in at $0.05 per basic and diluted share. Shipments of primary aluminum were also lower in the first quarter.

Investors will need a thick skin to endure what is often a bumpy ride for Century Aluminum, as its shares have fluctuated between $6 per share and $11 per share this year. The stock carries a market capitalization of just $860 million, so further volatility is likely.

A fair market reaction

The stock market sent Alcoa’s shares down on the day of its quarterly earnings report, albeit by just one penny per share. I felt the reaction was fair, given the mixed report. Alcoa is still in a turnaround phase. On the one hand, cash flow is improving, the balance sheet is in a stronger position than last year, and global demand for aluminum is looking firm for the remainder of the year.

On the other hand, Alcoa is still struggling to return to consistent profitability. Making matters even less inviting, shareholders aren’t being paid to wait for the company to return to strong financial footing. Alcoa slashed its dividend by more than 80% during the heart of the financial crisis, and hasn’t lifted its payout since then. At current prices, the stock yields just 1.5%, less than the yield on the broader market.

Only those with a very long-term view should consider buying Alcoa stock. It’s entirely reasonable to think that the aluminum industry is close to a bottom, but where that bottom is and how long it takes to get there is impossible to know for sure. In the meantime, there are plenty of other blue-chip stocks worthy of investment that provide their shareholders with more consistent profits and more compelling dividends.

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Robert Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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