One of the toughest things about investing into Alcoa Inc (NYSE:AA) is the volatility in the aluminum market. There’s an abundance of bauxite ores in the world (which is the material that alumina is extracted from). The company believes that the price of aluminum will eventually stabilize. If the price of aluminum stabilizes, there may be a worthwhile investment thesis.
The company reported a $119 million net loss for the second quarter of 2013. The loss was driven by a $244 million restructuring charge, paired with a year-over-year $149 million decline in revenue. The second quarter was considered a success because the company was able to report $228 million in free cash flow.
Over the past six months, the price of aluminum has been on a consistent down trend. This is because of an overabundance of aluminum. Alcoa Inc (NYSE:AA) CEO Klaus Kleinfeld told CNBC, “I can’t predict where the metal price is going to go. I tend to believe we’re seeing a low at this point.” The price of aluminum had an unfavorable impact of around $150 million over the course of the previous quarter.
Alcoa Inc (NYSE:AA) projects that by the end of 2013 there will be a 315,000 metric ton deficit of aluminum. The deficit in aluminum will cause the price of aluminum to go up. Because of these assumption analysts are forecasting a 50% year-over-year increase in earnings for 2013 and 66.7% for 2014.
How to position
The basic laws of supply and demand would dictate an increase in price. Therefore, the price of aluminum is likely to go up in the future. A small position should be considered in the stock. However, an investor should consider a longer-term position in other companies to off-set the potential risk of aluminum prices falling even further.
Ford Motor Company (NYSE:F) and The Boeing Company (NYSE:BA) could be solid alternatives. They’re not as exposed to the risk of falling aluminum prices. In fact, the two companies could experience a marginal improvement due to falling aluminum prices.
Ford is built for investment
Over the past several years, the top-level-management has been extremely disciplined about managing its costs and improving the Ford Motor Company (NYSE:F) brand. The company reported significant growth in its China segment. The number of vehicles sold in the first-half increased by 47% year-over-year. The company also reported June U.S. auto sales were up by 13% year-over-year.
The company has been heavily focused on delivering higher quality products in both its Ford Motor Company (NYSE:F) and Lincoln line-up. The designs are classier, sportier, and more futuristic. The company is well on its way to achieving long-term growth as it is capturing market share against Asian competitors like Toyota Motor Corporation (ADR) (NYSE:TM), and Honda.