Alcoa Inc (AA), Rio Tinto plc (ADR) (RIO): This Aluminum Producer Could Be Worth the Risk

Threats and competition
Alcoa also faces stiff competition, both from Chinese rivals and from large, diversified companies who can employ economies of scale and run more efficiently. A good example of the latter is Rio Tinto plc (ADR) (NYSE:RIO), which is about eight times the size of Alcoa in terms of market cap. In addition to aluminum, which only accounts for 18% of total revenues, Rio produces iron ore (44%), coal (10%), copper (12%), and diamonds and minerals (7%). In other words, not being too dependent on aluminum revenues puts companies like Rio Tinto in a good position to weather the storm of low aluminum prices. Rio is actually pretty cheap right now, with shares trading for less than 10 times this year’s expected earnings.

On the Chinese side, Aluminum Corp. of China Limited (ADR) (NYSE:ACH) was established to be the primary aluminum producer in China. The company has had the same oversupply problems as Alcoa and the charts of the two companies’ share prices look incredibly similar. Having said that, the state-controlled nature of the company should cause added nervousness when considering the company as an investment. On a positive note, however, the company (also known as CHALCO) announced in June that they plan to cut production by 9% in order to help boost aluminum prices. It is always refreshing when companies decide to become part of the solution and not part of the problem.

To buy or not to buy?
If you believe that the efforts by the aluminum producers to control production capacity will succeed, and that the world economy will continue to grow over the next several years, there could be money to be made with Alcoa. Next year’s consensus calls for earnings of 50 cents per share, meaning that shares currently trade for about 15.8 times next year’s earnings, which may sound high for such an uncertain industry. However, the estimates from the 18 analysts covering the company range all the way up to $1.00 per share, which would result in a price target of about $13.00 per share given Alcoa’s historic P/E in times of upward momentum in the industry. While the recovery in the aluminum industry is far from certain, it could pay off very well if things go right over the next year or so.

The article This Aluminum Producer Could Be Worth the Risk originally appeared on Fool.com and is written by Matthew Frankel.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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