Aluminum Giant Says Buy Airplanes

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Alcoa (NYSE: AA) just announced earnings that beat Wall Street's pretty low expectations. While solidifying demand is good for Alcoa, the company expects notable growth from the aerospace industry. That suggests solid outlooks for General Electric (NYSE: GE) and Boeing (NYSE: BA).

A Tough Market

Alcoa is one of the largest aluminum companies in the world. It's been a rough business since the housing market burst and the associated 2007 to 2009 recession. The company's revenues peaked in 2007 at $30.7 billion and fell to $18.4 billion by 2009. Earnings went from almost $3 a share to a loss of about $1.25 over that span.

Although the top- and bottom-lines have picked up since, at around $23.5 billion and just under $0.20 a share, respectively, 2012's performance remains well below peak levels and below 2011's levels. Alcoa is still working through a tough market. That said, it is taking the right steps by streamlining its business, reducing costs and shuttering unneeded capacity. And that it has been able to remain profitable in a difficult industry environment speaks to its strength as a company.

Alcoa made headlines recently for being downgraded to junk status by Moody's. That said, it was able to pare its debt in the second quarter by over half a billion dollars. That leaves long-term debt at about a third of the capital structure as of June, not an unreasonable level for a major manufacturing company that's still making money in a weak market.

Although the price to earnings ratio is unrealistically high at around 35, that's based on a market floundering through the trough of a cycle. Alcoa is a compelling way for investors to get exposure to the aluminum market before it starts to turn higher.

Looking Up

And, according to Alcoa, demand for end products is starting to improve even though there remains too much supply on the metals side of the business. One area doing particularly well is aerospace, where management expects “9% to 10% global growth for this year.” Management also noted that “the backlog for Airbus and Boeing now makes up 9,900 planes, and that equals eight years of production.”

Alcoa is one way to play this, but so, too, is an investment in Boeing. Boeing and Airbus have an effective duopoly in the large commercial aircraft space. Although an eight year backlog is impressive, Mario Gabelli recently noted that “Over the next 20 years, the global passenger aircraft fleet is projected to double...and roughly 34,000 new aircrafts will be needed for industry growth and replacement.”

The nature of Boeing products can leave the top- and bottom-lines a bit choppy. However, sales have increased from about $64 billion to almost $81.7 billion over the last three years. Earnings were nearly $4.50 a share in 2010 and about $5.10 last year, down from almost $5.35 in 2011.

The shares are trading near all-time highs and have a PE of around 20. That's a little steep, but with such a solid outlook for the industry, growth investors should still find the stock compelling.

The Power of Flight

For those seeking a lower price point, General Electric shares are trading at a PE multiple of around 17 and remain well off of their all-time highs. Aloca notes that “new aircraft orders also translated into new orders for jet engine...GE recorded over $26 billion in engine deals” at the Pairs Air Show. The Aviation segment represented nearly 14% of the company's top-line in 2012.

While that's not a massive business, it's second only to the Power and Water division on the industrial side (GE's financial arm accounted for around 31% of the top-line). So, a positive outlook for airplane sales is a notable plus for GE's turnaround efforts.

The industrial giant got itself into trouble in the recession because it had allowed the finance division to become too large and let it venture into non-core businesses. Chastened by taking a government handout and cutting its dividend, GE is getting back to its industrial roots. It sold NBC and is shrinking GE Capital, albeit slowly. That said, there have been discussions of a potential spin-off of non-core segments of GE's finance division, which would be a quick way to reduce the risk of that segment.

The shares yield around 3.2% and earnings have headed higher in each of the last four years. That should interest growth and income investors, particularly those looking for a turnaround story. Note that the company just reported solid second quarter earnings, too.

A Trio to Watch

For investors interested in out of favor industries, Alcoa is a great option for getting into the aluminum market. It has been performing well despite the industry's rough patch and should benefit notably when aluminum prices solidify. Boeing, meanwhile, is a key customer and one that Aloca expects to do well for years into the future. The same is true of General Electric. Although Boeing is a bit pricey, making it appropriate for growth investors, GE should interest those is search of growth and income.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. 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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