Alcoa Inc (AA) Offers Little to Look Forward To

Diversified miners are a better bet

Given the turbulence in the overall commodity sector it is a better option for investors to park their dollars with diversified miners. The world’s two largest mining companies – BHP Billiton Limited (ADR) (NYSE:BHP) and Rio Tinto plc (ADR) (NYSE:RIO) can be good choices.

Both BHP and Rio are cheaper than Alcoa, while having higher operating margins and higher returns on assets. BHP Billiton Limited (ADR) (NYSE:BHP) has forward price-to-earnings ratio of 12.5 times and Rio 8.4 times vis-a-vis Alcoa’s 15.36 times. Their operating margins are 29.96% and 22.49% respectively paling the latter’s 3.5%. Similarly the returns on assets for the diversified duo are 9.74% and 6.04% while Alcoa’s is just 1.31%.

BHP Billiton Limited (ADR) (NYSE:BHP) and Rio Tinto plc (ADR) (NYSE:RIO) have both announced record iron ore production from their mines in Australia and are currently looking to expand iron ore production. The two of them would add 11 million tonnes of incremental production over the coming six months. Although iron ore prices are a concern on account of slowing Chinese consumption but the weakness in Australian dollar has provided miners with a good cost advantage.

Meanwhile, Rio Tinto plc (ADR) (NYSE:RIO) being the parent of aluminum producer Alcan may follow Alcoa’s footsteps and announce capacity cuts. But, its aluminum operations contributed just 10% to its earnings last year. Both BHP Billiton and Rio have been on the lookout for buyers for divesting their aluminum operations.

Net-net

Alcoa Inc (NYSE:AA) has been executing impressively and holding its ground against tough market conditions. But, unless aluminum prices do a u-turn, the company is unlikely to see any meaningful growth. Moreover, the stock is not cheap compared to other big mining companies. So, it is definitely not the time to buy Alcoa, but current investors may hold on to the stock for changes in the market dynamics.

The article Alcoa Offers Little to Look Forward To originally appeared on Fool.com and is written by Gaurav Basu.

Gaurav Basu has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Gaurav 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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