Alcoa Inc. (AA) is Finally Ready for a Breakout

Alcoa Inc. (NYSE:AA) has been pushed down over 70% the last five years as a weak aluminum industry continues to plague the company. This aluminum miner is a situational turnaround story that may finally get a breakout in the near future thanks to bolstering industry fundamentals. Ray Dalio, founder of Bridgewater Associates, is one of Alcoa’s big name investors (check out Ray Dalio’s top picks).

The aluminum company has been looking to establish itself in new markets that includes packaging and transportation. Alcoa recently signed a deal with Airbus to provide aluminum sheet and plate for aircraft manufacturing – a deal valued at $1.4 billion. Other key initiatives include a joint venture with a Saudi Arabian mining company to build the largest low-cost aluminum facility in the Middle East. Going along with its cost cutting efforts, Alcoa curtailed its smelting capacity by almost 400,000 metric tons earlier this year in an effort to trim excess fat, so to speak.

Alcoa is expecting aluminum demand to be up in the current fiscal year thanks to continued demand increases in North America, Brazil and India. The real fundamental demand driver will be an expected 10%+ increase in China. Compared to the other major mining companies Alcoa has seen some of the more robust weakness, with 5-year average operating margin in the mid-single digits, where all the other mining stocks have an average of 25% or higher. In an effort to combat a declining margin problem, Alcoa hopes to improve its midstream and downstream operations.

Alcoa sales are expected to be down 6% in 2012, but rebound strongly, up 9% in 2013 on the back of rising aluminum prices. Part of the driving force for aluminum demand is the economic outlook. GDP for the U.S. is expected to grow 1.8% in 2013 and global GDP of 2.3%. Although there are a number of other more diversified mining companies with some exposure to the aluminum markets, such as BHP Billiton Limited (NYSE:BHP), Vale SA (NYSE:VALE), Cliffs Natural Resources Inc (NYSE:CLF) and Rio Tinto PLC (NYSE:RIO), we believe that the positive price and volume increases will drive Alcoa the highest. But what about the competitors?