Filed under: International markets, Rants and raves, Competitive strategy, China, Alcoa Inc (AA), BHP Billiton Ltd ADR (BHP), Rio Tinto plc ADS (RTP), Comfort Zone Investing, Commodities, Aluminum Corp of China ADS (ACH)
In one of my recent posts on stock pricing, I received a comment from one of our more acerbic readers, who asks some good questions once he simmers down. He wonders why investors have not bid up the share price of Alcoa Inc. (NYSE: AA):
- “How come nobody has the hots for ALCOA? It is very cheap. . . There is mining stock merger-mania yet nobody is buying ALCOA in anticipation of it occurring to ALCOA as well. Are we gonna wait until it is too late?”
First of all, I should remind everyone that the price of a stock on any given day is a myth. It is worse than a myth, it is just a fleeting moment in time. I would call it semi-arbitrary most of the time.
Alcoa closed yesterday at $34.06, having a trailing P/E ratio of 11.5. That falls between its 52 week low of $26.69 and its high of $48.77. Also worthy of note, Alcoa has a yield of 2% which is about 10% higher than your average S&P stock. This seems positive.
Perhaps my friend is on to something. Alcoa is off its high considerably and has a lower P/E and higher yield then any of the indices. But its ROE of 15 and ROIC of 11 are all too average, not exceptional — and these are important considerations. The P/B of 1.89 also seems average but the P/S of 1.03 looks very appealing.
An investment in a stock is based on future earnings and the metrics that we use to anticipate them. In examining Aloca prospects for this year I found that analysts believe 2008 earnings will be less than they were in 2006 and perhaps the same as last year. Speculation about 2009 is higher, but it is speculation.
It seems that in making a bid for Alcan last year and buying a portion of Rio Tinto plc ADS (NYSE: RTP) this year, Alcoa is trying to buy its way into some growth because on its own it is having difficulty finding any. That is not to say that the company is not valuable, but the value is very well established. Hopes for a rally may rely on the futures price of aluminum more than expanded operations.
In comparing Alcoa, which I have considered buying periodically, to one of my favorites, the Aluminum Company of China (NYSE: ACH) (often referred to as Chalco), I found it wanting. ACH has a lower P/E of 10 and higher yield by 10% of 2.2%, a P/S of 0.35, an ROE or 30 and a ROIC of 21 and better growth prospects in the largest new market, China.
As I remind investors, AA and ACH share prices are based on future prospects and ACH wins that discussion very easily. Given that the P/S is less than half and the ROE and ROIC are double that of Alcoa, there is no contest. Alcoa knows this all too well and has actually teamed up with Chalco in acquiring a portion of Rio Tinto and helping them hold off hostile bidders BHP Billiton Ltd ADR (NYSE: BHP).
If I were to guess how Alcoa (the stock) does this year, I think it just keeps on coasting along with the price of aluminum until some new catalyst triggers some buying. That could be a major merger or acquisition, a buyout, a huge increase in the demand side if construction spending in North America picks up, or entering a new related business with better growth prospects.
All said, Alcoa should be on your watch list because even without a major catalyst it is still building equity, just slower than others, and if the price stays depressed at current levels, by next fall it could very well be a steal and you will get to it first.
Sheldon Liber is the CEO of a small private investment company and the design and research principal for an architecture & planning firm. To find potential opportunities and verify his track record, read Chasing Value or Serious Money. Disclosure: I own shares of ACH.
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