What’s so Surprising about Alcoa?
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Let's begin with a quick trip down memory lane. It was late December of 2011 -- seems so long ago now, weird – that the winds of positive change started blowing Alcoa’s way. When that article was written the Dow component was trading at or near a two-year low of about $8.50 a share - a full $10 off their 52-week high. Ouch. They weren’t alone of course. Freeport–McMoRan Copper & Gold and Brazilian firm Vale S.A. were also taking it on the chin.
What was surprising was all this was happening during a time of slowly improving economic indicators. Unemployment numbers had just started to show some signs of life, businesses were beginning to spend and manufacturers from planes to automobiles were forecasting a great year. Alcoa (NYSE: AA) – as with most large, basic material companies – lives and dies by what’s going on in the economy. If companies aren’t spending and manufacturing, Alcoa’s going to have a tough time. The question raised in the article posted the end of last year still warrants consideration – was the company and the economy really in a worse state in 2009 then late 2011? That’s one of those proverbial no-brainers right there.
Hopefully you were able to get on board then and have enjoyed double-digit share price growth and the 1.2% dividend as a result. If not you may wonder if you’re too late, what with the recent run-up. A quick look at the results and expectations going forward should answer that for you.
As you might imagine, yesterday's after-hours trading – Alcoa announced earnings after the close last evening – was heavy and all positive.
In large part based on improved productivity and operations – and in spite of high energy prices – Alcoa earned about $94 million for the quarter on revenue of $6 billion. Though revenue matched the year-ago quarter, last year profits were in the red. But it was actual earnings vs. analyst expectations that really blew the lid off the stock. Consensus estimates were for a loss of $0.04, instead the company turned in a $0.10 a share gain on continuing operations. No wonder they’re flying high.
What’s even more exciting is what’s coming for the balance of the year. Should the company continue to adroitly manage operations and the economic situation simply remain where it’s at – let alone continue to improve – there’s every indication Alcoa will continue to perform.
Let’s play around with a few what-ifs. Estimates of $0.50 a share are now being bandied about by analysts at Dahlman Rose & Co, up from the earlier $0.40 a share expectations. Not surprisingly others have their calculators at hand and are starting to tweak Alcoa numbers too. At current multiples revised earnings would make Alcoa about a $15+ stock. Too aggressive, you say? Imagine if you will Alcoa only earns $0.45 a share for 2012 – a $13.50 stock (give or take) from current levels isn’t exactly a disappointing return by any measure.
A conservative 30% gain on the low end is nothing to sneeze at, and if industry insiders and pundits are even close, investors can expect an even better 2012 than that. Bottom line is this – there’s still time and you’d be wise to give Alcoa serious consideration – they’ve earned it.
The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article.