Is This Aluminum Producer Cheap Enough Yet? – Alcoa Inc. (AA), Exxon Mobil Corporation (XOM), Aluminum Corp. of China Limited (ADR) (ACH)

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After the oil bubble peaked in 2008, virtually all commodities took a nosedive.  For example, crude oil prices retreated from over $144 per barrel to the $35 range in less than a year.  Aluminum was no exception, falling from a peak of $3,070 per metric ton in August 2008 to a low of $1,340 in February 2009.  Since then, it has rebounded to just above $2,000 per metric ton, or about 35% below its peak.

AlcoaHowever, the share price of my favorite aluminum producer, Alcoa Inc. (NYSE:AA) has not rebounded accordingly.  On the contrary, it keeps getting cheaper, currently trading for under $8.50 per share, a long way down from its pre-crash peak of $48.77.  In other words, the stock is still almost 83% off from peak levels.

For comparison sake, crude oil currently trades at around $91 per barrel, off about 37% from its peak, similar to aluminum.  However, when looking at the world’s largest oil company, Exxon Mobil Corporation (NYSE:XOM), the share price is within 8% of the peak, and in fact the company’s earnings in 2012 have surpassed any results in Exxon Mobil Corporation (NYSE:XOM)’s history.  I realize that the comparison of aluminum and oil is not ideal, but generally commodity-dependent companies have historically performed similarly.  Is Alcoa Inc. (NYSE:AA) finally cheap enough to buy or will earnings continue to be poor?

About Alcoa and the Aluminum Business

Alcoa Inc. (NYSE:AA) is one of the world’s largest aluminum producers, with 2012 production of 3.74 million metric tons.  The main flaw in my earlier comparison of oil and aluminum is the difference in demand.  While oil demand remains relatively constant, the demand for aluminum is highly dependent on economic growth and certain types of growth in particular.  In fact, the three largest end markets for aluminum (transportation, containers, and construction) account for 62% of all usage.

If you are bullish about global economic growth, particularly in terms of the transportation and construction industries, Alcoa Inc. (NYSE:AA) (or a similar aluminum producer) is the way to play it. I believe that with the combination of the continuing American economic recovery, as well as my belief that Europe’s economic troubles will stabilize over the next few years, we will see a healthy rise in global aluminum demand for years to come.


Over the past several years, Alcoa Inc. (NYSE:AA) has taken measures to cut costs that analysts generally think will begin to show results in 2013.  Alcoa Inc. (NYSE:AA) is projected to earn 61 cents per share for 2013, meaning the stock is trading for 13.8 times forward earnings, which are expected to grow to 87 cents and 94 cents in 2014 and 2015, respectively, for an average forward growth rate of 25.3%.  While these are ambitious and somewhat uncertain predictions, if these were to prove accurate, earnings growth like this should do wonders for the share price.

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