Alcoa Inc. (NYSE:AA), the $9.5 billion market cap producer of aluminum (read our analysis of Alcoa from December), reported its earnings for the fourth quarter of 2012 earlier this month and the market’s reaction was neutral. The stock price showed little change after the company announced that lower costs had helped it turn a profit, something it had not achieved a year earlier or in the third quarter of 2012. Revenue had declined 2% from the fourth quarter of 2011 but crawled up 1% on a q/q basis.
Two of Alcoa Inc.’s Board members, Martin Sorrell and Ratan Tata, thought that Alcoa’s report was good news. Each of them bought close to 2,100 shares (a slightly higher number for Sorrell than for Tata) of the stock at prices of about $8.92 per share on January 11th. Sorrell now owns about 8,100 shares while Tata’s direct holdings amount to close to 34,000 shares of stock. Insider purchases, statistically, are bullish signals (read more about studies on insider trading) and consensus insider purchases- events when more than one insider is buying- are particularly good signals, though of course there are cases when stocks bought by insiders underperform the market. Learn more about consensus insider purchases. These particular insiders were also buying last fall, one in October and one in November, at prices less than $8.90 per share (research insider purchases at Alcoa).
Wall Street analysts expect Alcoa Inc. to earn 64 cents per share in 2013, as opposed to the 24 cents per share in adjusted earnings the company had in 2012. The 64 cents figure results in a current-year P/E of 14, which would be about right for a company with very low earnings growth. However, the sell-side believes that Alcoa’s EPS will continue to significantly increase in 2014- the forward P/E is only 10- and so we’d characterize the analyst consensus as bullish. Of course, that doesn’t mean too much, and as with many other basic materials companies Alcoa has high market exposure (the stock’s beta is 2). Hedge funds are somewhat cool on Alcoa: the only two positions worth over $20 million in our database of 13F filings belonged to Ron Gutfleish’s Elm Ridge Capital and billionaire Israel Englander’s Millennium Management (see Millennium’s favorite stocks); each of these funds had sold shares in the previous quarter.
What about other mining companies?
We would compare Alcoa to other miners whose profitability is tied to economic activity, including BHP Billiton Limited (NYSE:BHP), Rio Tinto plc (NYSE:RIO), Vale SA (NYSE:VALE), and United States Steel Corporation (NYSE:X). Vale appears to have the best claim to value status as far as multiples are concerned, with trailing and 2013 P/E multiples of 9, but financial performance has been poor recently including a large decline in net income. U.S. Steel has been struggling- and is still a popular short, with short interest equal to 21% of the outstanding shares- and even though the Street sees a decent year ahead we’d avoid the stock; even if we were taking analyst estimates at face value, Alcoa has a lower 2013 earnings multiple. BHP Billiton and Rio Tinto have also been reporting sizable declines in revenue and earnings from a year ago, and the earnings multiples aren’t particularly attractive at those companies. Rio Tinto does carry a current-year P/E of only 8, based on high expectations for earnings growth, but even in that case we would need to see better actual financials.
Alcoa wouldn’t be a bad value if it hit its earnings targets for this year, and if it continued to improve in 2014 it would turn out to be a good value at the current price. With multiple insiders buying, we would hold off for now but certainly think that it could make for a good watch list stock for the first half of the year.
