Buy Beaten-up Alcoa Inc (AA)?

In summing up his company’s quarter, CEO Klaus Kleinfeld said: “Our business showed remarkable operating performance in the quarter with solid free cash flow. In our value-add businesses we reached another milestone with record profitability in our downstream business, while acting decisively to defy the headwinds of falling metal prices in our upstream businesses.”

Better approaches to aluminum
With its quarterly results out of the chute, then, the question becomes whether Alcoa’s shares constitute appropriate additions to Foolish portfolios. My reading, despite admittedly owning the stock, is that they do not.

Were I looking at the company anew, I’d be put off by product price declines, the ongoing federal investigations, the likely need for additional downsizing and cost cutting. And then there’s the substantial expansion in global aluminum supply.

Conversely, smaller Kaiser Aluminum (NASDAQ:KALU) produces more specialty products, is close to being debt free, and generates an operating margin nearly four times that of Alcoa. Further, the California-based company has been accorded a consensus buy rating by the analysts who follow it, against a hold for Alcoa.

Alternatively, I’d look closely at Rio Tinto (NYSE:RIO), the Anglo-Australian mining giant, which is nearly nine times the size of Alcoa, and generates an operating margin more than seven times Alcoa’s. In addition to being a major factor in aluminum production — having snatched Canada’s Alcan from Alcoa’s grasp several years ago — Rio produces an array of minerals and metals, including copper, molybdenum, diamonds, iron ore, coal, and precious metals.

It thereby enjoys some protection from sliding copper prices. The company’s PEG ratio is a compelling 0.47, and its indicated forward annual dividend yield currently is and attractive 4.60%.

Foolish takeaway
So, while Alcoa kicked off earnings season by slightly topping the analysts’ expectations, there clearly appear to be more appropriate options for Fools with an interest in aluminum manufacturers.

The article Should You Buy Beaten-up Alcoa? originally appeared on Fool.com is written by David Smith.

Fool contributor David Smith owns shares of Alcoa. The Motley Fool has no position in any of the stocks mentioned.

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