Earnings highlights
The company reported a $119 million net loss for the second quarter of 2013. The loss was driven by a $244 million restructuring charge, paired with a year-over-year $149 million decline in revenue. The second quarter was considered a success because the company was able to report $228 million in free cash flow.
Source: LME
Over the past six months, the price of aluminum has been on a consistent down trend. This is because of an overabundance of aluminum. Alcoa Inc (NYSE:AA) CEO Klaus Kleinfeld told CNBC, “I can’t predict where the metal price is going to go. I tend to believe we’re seeing a low at this point.” The price of aluminum had an unfavorable impact of around $150 million over the course of the previous quarter.
Source: Alcoa
Alcoa Inc (NYSE:AA) projects that by the end of 2013 there will be a 315,000 metric ton deficit of aluminum. The deficit in aluminum will cause the price of aluminum to go up. Because of these assumption analysts are forecasting a 50% year-over-year increase in earnings for 2013 and 66.7% for 2014.
How to position
The basic laws of supply and demand would dictate an increase in price. Therefore, the price of aluminum is likely to go up in the future. A small position should be considered in the stock. However, an investor should consider a longer-term position in other companies to off-set the potential risk of aluminum prices falling even further.
Ford Motor Company (NYSE:F) and The Boeing Company (NYSE:BA) could be solid alternatives. They’re not as exposed to the risk of falling aluminum prices. In fact, the two companies could experience a marginal improvement due to falling aluminum prices.
Ford is built for investment
Over the past several years, the top-level-management has been extremely disciplined about managing its costs and improving the Ford Motor Company (NYSE:F) brand. The company reported significant growth in its China segment. The number of vehicles sold in the first-half increased by 47% year-over-year. The company also reported June U.S. auto sales were up by 13% year-over-year.
The company has been heavily focused on delivering higher quality products in both its Ford Motor Company (NYSE:F) and Lincoln line-up. The designs are classier, sportier, and more futuristic. The company is well on its way to achieving long-term growth as it is capturing market share against Asian competitors like Toyota Motor Corporation (ADR) (NYSE:TM), and Honda.
Analysts remain fairly optimistic on Ford. With analysts on a consensus basis projecting the company will grow earnings by 11.9% per-year over the next five years. Investors are also compensated with a 2.4% dividend yield. The stock trades at an 11.4 price-to-earnings multiple, which is reasonable when considering the projected growth and dividend yield.
Get on board with Boeing
The Boeing Company (NYSE:BA) has a diversified set of businesses, but primarily the growth catalyst in the company is the rising demand for Boeing passenger aircraft. The backlog for airplane deliveries grew to a record $392 billion, which includes $20 billion of net orders during the quarter.
The company reported flat revenues in its most recent quarter because of its recent hiccup with the Boeing 787 Dreamliner. However, Boeing provided guidance that indicates that the company is still on track to grow earnings. The company estimates that it can grow earnings to $6.10 for fiscal year 2013 from the year-ago $5.11.
Over the next five years, analysts are optimistic, projecting that the company should be able to grow earnings by 13.92% per-year over the next five years. The company also compensates investors with a 1.86% dividend yield. The stock trades at a 19.6 earnings multiple, which is reasonable when considering the mid-double-digit growth rate, paired with the dividend yield.
Conclusion
Investing into Alcoa Inc (NYSE:AA) has been difficult over the past five years. Investing now, may mean considerable risk, due to the risk exposure to aluminum prices. The price of aluminum should go up in future years based on the supply/demand imbalance that Alcoa Inc (NYSE:AA) has projected. However, if things don’t go to plan, investors should consider diversifying into both Ford and The Boeing Company (NYSE:BA) in order to mitigate the risk of owning a commodity driven play like Alcoa.
The article Alcoa Could Be a Buy originally appeared on Fool.com and is written by Alexander Cho.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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