Since the market crash of 2008 and 2009, shares of Alcoa Inc (NYSE:AA) have plummeted more than 80%, while aluminum prices in the U.S have dropped by nearly 45%. Alcoa Inc (NYSE:AA)’s shares have under-performed almost all the major U.S. indices, which leaves little interest for growth investors.
More reasons to buy Alcoa
Alcoa Inc (NYSE:AA) recently reported its quarterly results. Its quarterly revenue stood at $5.8 billion, which declined from $6 billion in last year’s quarter due to lower alumina prices and fewer days of production. Despite the stressed top-line performance, Alcoa Inc (NYSE:AA) reported quarterly EPS of $0.11 compared to $0.06 in last year’s quarter.
Its management explained that aerospace, automobile and packaging volumes were up, which added $15 million to its net income. Meanwhile, the favorable price-to-volume mix in the U.S and Europe added another $21 million. Since the mentioned sectors are showing robust growth, it’s highly probable that Alcoa also continues its growth momentum.
On the fundamental side, Alcoa currently operates with a debt-to-equity ratio of 67% and $1.6 billion in cash. Its debt-to-capital ratio stood at 34.7%, and the company’s management is working toward lowering the debt metric to 30.5% this year. That calls for a significant amount of extinguished debt, which should lower its annual interest expenses by around 14%.
Currently, Alcoa Inc (NYSE:AA) has a total smelting capacity of 4.2 billion tonnes per annum, which makes Alcoa the world’s third-largest aluminum manufacturer, behind only Rio Tinto plc (ADR) (NYSE:RIO) and Rusal. Alcoa’s management expects annual aluminum demand to increase by 7% in FY13, and lowered the aluminum surplus estimate from 535,000 tonnes to 155,000 tonnes.
But last year, Alcoa lowered its overall production by 12%, which hasn’t been recouped yet. This puts Alcoa in a sweet spot, as it can ramp-up its production with the rising demand without expanding its current facilities. That’s an optimistic picture, which should be beneficial to most of the aluminum manufacturers but not all of them.
A company to avoid
Under normal circumstances, operational diversity spreads out risks and stabilizes cash flow. But diversified mining plays like Rio Tinto plc (ADR) (NYSE:RIO) and BHP Billiton Limited (ADR) (NYSE:BHP) are struggling with their towering debt.
Back in 2008, Rio Tinto plc (ADR) (NYSE:RIO)’s management team vowed to cut the company’s net debt by $10 billion. Since 2009, its net debt has declined from $38.9 billion to $21.1 billion. But for the loss-making company, a debt-to-equity ratio of 57% seems pretty high. To reduce its debt, Rio Tinto plc (ADR) (NYSE:RIO) would be selling its diamond assets for around $2.5 billion. Its management has assured that there won’t be any significant decline in its earnings, but Standard & Poor’s begs to differ.
S&P analysts have downgraded Rio Tinto plc (ADR) (NYSE:RIO) from stable to negative, stating that its net debt could worsen in FY13. The company has an extremely expensive operating structure, with $17 billion worth of annual capital expenditures.
Rio Tinto plc (ADR) (NYSE:RIO) already has an adjusted net debt of $33 billion, while its funds from operations-to-debt have declined from 85% in 2011 to 30% in 2012. Analysts at S&P believe that its FFO/debt ratio should be at least 40% for the company’s stable operations. With that in mind, investors should certainly avoid Rio Tinto plc (ADR) (NYSE:RIO) until its shows improvement in its financial health.
Wrap Up
Century Aluminum Co (NASDAQ:CENX) is another pure aluminum play, with an overall primary rated capacity of 674,000 tonnes. Additionally, the company owns a 49.7% interest in a plant at Mt. Holly, S.C., with a rated capacity of 224,000 tonnes. But its management believes that it won’t be able to meet rising aluminum demand.
That bodes well for the company, since its growth will be supply driven and not limited by market demand. Currently, shares of Century Aluminum Co (NASDAQ:CENX) trade at a forward P/E of 12x, and analysts estimate its annual EPS to grow by 7% over the next five years.
But if I had to pick one company to invest in, it would be Alcoa. The company has a low utilization rate, and can ramp up its production without product expansions, saving future capital expenditures. Its management is working toward lowering its debt levels, while its impressive financials present a bullish case.
The article A Great Way to Play Industrial Recovery originally appeared on Fool.com and is written by Piyush Arora.
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