It’s the business, stupid!
To paraphrase Warren Buffett, when a management team with a reputation for brilliance tackles a business with a reputation for poor economics, it is the reputation of the business that stays intact. The point is, clearly Alcoa’s management is sound. They have taken measures to improve margins, which include removing upstream costs and adjusting for a better mix with midstream and downstream businesses.
These moves demonstrate management’s strong understanding of the pulse of the company. But is it enough? As Buffett has said, the economics of this business is poor. In the long term, Alcoa should do well, but aluminum prices, which are still below normal levels, have to pick up. The good news, though, is that these prices should help the company reach or even beat expectations in the coming quarters, including its own outlook. This should position the company with increased confidence when the industry fully recovers as experts projects.
Win-win situations for investors
In the meantime, investors should be excited about continuing developments in China, as well as inroads in the aerospace and transportation sectors. The Boeing Company (NYSE:BA) continues to migrate its fleet of jets to aluminum, which should help spur more demand. Tony Morales, Alcoa’s marketing director, suggests that an “aluminum-intensive” narrow-body jet made of new alloys would be up to 10% lighter than a composite-intensive plane and would cost 30% less to build and repair.
For Boeing, the cost savings can be significant, which in turn should help improve margins. And Boeing can certainly use better PR help these days considering the numerous groundings it’s had to suffer with regard to safety. But in the meantime, Alcoa’s investors should not ignore an opportunity to buy at significantly discounted rates — the company’s management is too good and aluminum will always be in demand.
The article Alcoa Still Looks Better Than Its Industry originally appeared on Fool.com and is written by Richard Saintvilus.
Fool contributor Richard Saintvilus has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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