Alcoa Inc (AA): Going Long on the Dow (.DJI)’s Most Shorted Stock

Meanwhile Alcoa, despite its massive size, was able to grow its working capital at rates that are nothing to scoff at. You may notice that Alcoa’s Q1 2013 figure is a bit lower than the 2010-2012 average. Do not necessarily take this as a negative sign–you can’t place too much importance on fluctuations from one quarter to the next. Looking at the balance sheet will tell you that Alcoa added $600 million of short-term debt in the first quarter. What were management’s reasons for doing this? Was it in the best interests of the company? Alcoa’s financial statements will give you the answer to the first question, thereby allowing you to reach your own conclusions as to the answer of the second.

The working capital numbers can tell you a lot about a company’s current financial position. Alcoa’s current financial position is strong enough as to scare away only the most conservative of investors. But how does the long term debt look?

Long Term Debt $7.745 billion $622.5 million* $250.9 million
Average 2010-2012 $8.6 billion $435.46 million $249.54 million
Average 2000-2002 $6.578 billion $1.735 billion** $107 million
Total Debt/Equity Ratio 0.67 0.26 0.26

*As of Dec. 31, 2012. All other figures in that row are current as of the Q1 2013.

**During this period AWC had not yet separated itself from WMC Limited. A conglomerate that eventually got taken over by BHP Billiton.

Of the three companies Alcoa employs the most leverage, but has taken steps in recent years to significantly reduce it. The debt-to-equity ratio of Alcoa is much higher than the other two. Does Alcoa have the profit generating power to make assuming $7.745 billion in long term debt palatable to investors?

How are the earnings?

When it comes to earnings records, none in the aluminum industry stretch back farther than Alcoa because Alcoa practically invented the modern aluminum industry. Alcoa was founded in 1888 as The Pittsburgh Reduction Company, back when the only valuable thing owned by the company was a patent–a patent for a new process of extracting aluminum from aluminum oxide which finally made aluminum production economical. This discovery has allowed Alcoa to dominate the aluminum industry for over a century. How profitable has this dominance been for Alcoa? Cash flow from operating activities can give us some clues.

Operating Cash Flow 2012 $1.497 billion $48.6 million $37.14 million
Operating Cash Flow as a % of Market Cap 16.27% 1.9% 4.79%
Average Operating Cash Flow 2010-2012 $1.98 billion $148.43 million $55.24 million
Average Operating Cash Flow 2000-2002 $2.367 billion $544.55 million $50.404 million

As you may notice from the chart, the aluminum industry hasn’t been doing so great. Only one company, Century Aluminum, managed to raise its three-year operating cash flow average between 2002 and 2012. All three companies registered lower operating cash flow in 2012 than their average over the preceding three years.