Aluminum Company of America

AA

 

Please see disclaimer at bottom of this document

 

 

 

 

 

April 28, 2006 (33.56)

 

 

1.     Bond ratings remain A2/A-.  The 2010's are now yielding around 5.61, priced at around 106.5.

 

2.     The price of Aluminum today is $1.24.  Up quite substantially from 10/6/05 of $0.84 and March 21, 2005 of $0.91.

 

3.    Merrill has increased  F2006 eps estimates from $1.80 to $3.00.  Notice how they were projecting $1.90 on March 21, 2005.   They project $4.25 for 2007, $4.10 for 2008.

 

4.    Investment thesis mentioned here appears to remain intact.  Really have to watch the price of Aluminum.  Yet, I expect this will remain a long term hold.

 

5.    You can see some comparative ratios since 1970 at this link.

 

6.    I ran some future valuation scenarios using growth multipliers for 15 years.  I also used various metrics which may exist in year 15N.  These multipliers were based on Price to Sales, and Price to Book ratios.

 

 

October 6, 2005 (23.06)

 

1.     Bond ratings remain A2/A-

 

Agency (Scope)	Rating	Date
Standard & Poor's Long-term Issuer (Domestic) (8)	A-	6/20/2003
Standard & Poor's Long-term Issuer (Foreign) (8)	A-	6/20/2003
Standard & Poor's Short-term Issuer (Domestic) (2)	A-2	6/20/2003
Standard & Poor's Short-term Issuer (Foreign) (2)	A-2	6/20/2003
Fitch Issuer (Foreign) (2)	A	9/26/2005
Fitch Short-term Issuer (Foreign) (2)	F1	9/26/2005
Fitch Long-term Issuer Default Rating (Foreign) (3)	A	10/5/2005
Fitch Short-term Issuer Default Rating (Foreign) (3)	F1	10/5/2005

 

 The 2010's are now yielding around 4.78, priced at around 111.  Bonds are certainly not showing a distressed situation.

 

2.    The price today is .8396.  Of course that is down substantially from the March 21, 2005 price of .9086.  Here is a graph from www.metalprices.com  

 

 

3.    Merrill has reduced F2005 eps estimates to 1.50 from 1.80.  Notice how they were projecting 1.90 on March 21, 2005.  They base this on lower than forecasted aluminum price.  They project $0.84 for 2005, $0.90 for 2006 and $0.87 for 2007.

 

4.    Earnings shortfall is being blamed on higher resin costs.  Alcoa is feeling the effects of Hurricane's Rita and Katrina.

 

5.    Concerns for the short to mid term of Alcoa are cash flows being used by capital outlay projects.  Higher commodity costs may cause cost overruns on these projects.

 

6.    Alcoa will be investing $1.6B  in Brazil investments.    Interesting is this could be considered a socially irresponsible project, as it is in the Amazon.

 

7.    AA could be a contrarian strong dollar play.

 

8.    Risks to Alcoa include aluminum price weakness, weak US dollar, raw material inflation, higher power costs, China exports higher than expected, cost overruns and a weak global economy.

 

9.    Investment Thesis:

 

    A.    Increased Aluminum prices.

 

    B.    Investing in increased raw materials prices.  Right now, oil is priced high and hurting the short term earnings of Alcoa (and I would imagine all Aluminum producers).  Eventually, I would expect these costs to be absorbed by the customers of Alcoa.

 

    C.    Alcoa has consistently made profits since 1989.  There will always be peaks and valleys.

 

    D.    Dividend yield is 2.61% ($0.60/23)

 

    E.    ROE over the last 16 years has ranged from 7.9% to 17.8%.

 

    F.    alumina expansion has increased worldwide.  China remains an unknown and could negatively surprise Alcoa's business model.

 

    G.    Corporate officers are paid amounts often in excess of $1M annually.  Warren Buffett would argue that this is too much payment for officers.  I would tend to agree.  Option grants  and rewards also seem excessive.  These officers with what I interpret to be excessive shareholder grants, combined with Compensation and bonuses in excess of $1M annually include CEO A. Belda,  EVP Europe R. Belda, CFO Kelson, EVP Reitan and EVP Thomas.

 

    H.    Some Selected Insider Holdings as of 9/30/05

 

 

    I.    Shares Outstanding:

 

 

 

10.    Quick Modeling:

 

Company	Alcoa
Symbol	aa
Report Date	06-Oct-05
Report Used	rbco
Base Year	2005
Price	23.040
30 year Bond Rate (AAA)	5.77%
S & P Bond Rate	A-
Sales Per Share	29.03
Price/Sales	0.79
Total Interest Coverage	6.3
Growth Rate	8.00%
Earnings Per Share	1.50
Projected EPS Year 2	1.60
Projected EPS Year 3	1.73
Projected EPS Year 4	1.87
Projected EPS Year 5	2.02
Dividends Per Share	0.60
Dividend Yield	2.60%
Book Value Per Share	15.17
Intangibles Per Share	7.54
Net Book Value Per Share	7.63
Price/ Net Book Value	3.02
Return on Shr. Equity	9.85%
ROE/PE (current)	64.13%
ROE/PE  Year 2	68.40%
P/E Ratio Current	15.36
P/E Ratio Year 2	14.40
P/E Ratio Year 3	13.33
P/E Ratio Year 4	12.35
P/E Ratio Year 5	11.43
Inverse P/E Current	6.51%
Inverse P/E Year 2	6.94%
I/P/E to Bond Rate (Current)	112.83%
I/P/E to Bond Rate Year 2	120.35%
Div Yield / AAA Bond	45.13%
PEG Ratio (Current)	1.92
PEG Ratio Year 2	1.80
PEG Ratio Year 3	1.67
PEG Ratio Year 4	1.54
PEG Ratio Year 5	1.43
PEGY Ratio (Current)	1.45
PEGY Ratio Year 2	1.36
Graham Ratio (current)	46.38
Graham Ratio Year 2	43.48
Highest P/E Avg 5 + Years	36.30
P/E  (current) to High P/E	0.42
P/E  Year 2 to High P/E	0.40
Intrinsic Value (current)	28.02
Price / Intrinsic Value(current)	82.21%
Intrinsic Value Year 2	29.89
Price / Intrinsic Value Year 2	77.08%
Intrinsic Value Year 3	32.28
Intrinsic Value Year 4	34.87
Intrinsic Value Year 5	37.66

 

 

 

 

 

 

 

March 21, 2005 (31.42)

 

Bonds are still rated A2/A- (Upper Medium Grade).  Here is where a big change exists.  The 2010's are now yielding around 4.75, priced at around 104.  The 104 price is down from 115 on January 25, 2005.  The 30 corporates on AAA are now yielding less than the 5.60% quoted on January 25, 2005.  The yield is now 5.33%.  I got that number from TD Waterhouse Corporate Bond results.  The 30 year treasury is yielding 4.822% ( according to briefing.com).

 

According to www.metalprices.com  on 03/21/05 Aluminum is $0.9086 lb.

 

Merrill reduced 2005 eps to 1.90 and kept 2006 at 1.50.  Merrill claims that higher raw material costs are reason for lowered estimate.  Costs consist of power, carbon anodes and caustic soda.  Energy costs are having a lagging effect. 

 

Morgan Stanley has reduced 2005 eps to 1.76 and has 2006 at 2.15, F2007 at 2.00.

 

Notes on 10K

 

1.    Electric power accounts for 25% of primary aluminum costs.

 

2.    Research and Development Costs

 

 

3.   Ratio of Earnings to Fixed Charges

 

 

4.    January 2005 S&P revised debt outlook to negative from stable, citing higher capex.  This could be a reason for the higher yield quoted at top of the post on 3/25/05.

 

5.    Post Retirement Plan asset allocation   

 

 

2005 Guidance

 

1.    Capex to grow to $2.5B . Increase of $1.4B , primarily because of previously announced major growth projects.

 

2.    Continue to maintain 25% - 35% debt to equity levels.  This was discussed during conference call.

 

3.    Plans to start expensing options in 3Q05.

 

 

 

January 25, 2005 (28.37)

 

Bonds are rated A2/A- (Upper Medium Grade).   The 2010's which we quoted in 2/18/03 are yielding around 4.10%, priced at 115 and change.  These are nearly the same price as our December 16, 2004 posting.   The 30 year corporates on AAA are still yielding around 5.60%. ( from http://www.nasdbondinfo.com/asp/bond_search.asp) The 30 year treasury is yielding 4.643% ( according to briefing.com).

 

Value Line 01/21/05 projects 10% earnings growth F2005.  This is based on strong global economy and demand for aluminum fabricated products.  Rising costs will pressure earnings.  Rising prices include carbon, natural gas and caustic soda.  Weak US Dollar apt to hurt earnings in non - US manufacturing units.  eps estimates reduced to $2.35 from 1.45.  Reduced debt by 1 billion for 2nd year in a row.  Debt to Capital is around 35%, which is 15% lower than 2 years ago.

 

Merrill projects 2005 eps at 2.30 and F2006e at 1.50.  2005ests are based on Al price of $0.90 lb.  2006 estimate is based on Al price of $0.76, at $1.00 price, eps would be $3.00/share. 

 

According to www.metalprices.com  on 01/25/05 Aluminum is $0.8215 lb. 

 

JP Morgan estimates 2005 eps at 1.75.  Believes that management will manage balance sheet effectively.  "muted outlook".  Feels that estimate of 2.34 in F2005 is too optimistic. 

 

Smith Barney believes that AA has solid financial profile. 

 

Morningstar has a $26 target.  forecasts revenue growth of 6% through 2008.  capex expected at 5% of revenue.  Operating margins to increase to 13.7%.  Risks include China becoming net exporter if output increases.  Goodwill accounts for 1/2 of the assets.  Looking at financials, AA has "take or play" contracts, which have a present value of $2 billion , not reflected in balance sheet.  ROIC less than 5% for last two years. 

 

Argus calls dividend of $0.60 as safe, yet doesn't expect raise.  Argus has a hold.

 

 

December 16, 2004 ( 31.06)

 

Bonds are rated A2/A- (Upper Medium Grade).   The 2010's which we quoted in 2/18/03 are yielding around 4.00%, priced at 116 and change.  The 30 year corporates on AAA are still yielding around 5.77%.  the 30 year treasury is yielding 4.817% ( according to briefing.com).

 

JP Morgan downgraded due to higher costs.  They site caustic soda as a primary cost .  They also site, negative currency impact, sluggish seasonal demand for key markets like building and automotive.  they expect an earnings shortfall.  They site that caustic soda is a key raw material in alumina refining process.  They reduced F2005 eps est from $2.70 to $1.80. 

 

According to www.metalprices.com  on 12/16/04 Aluminum is $0.82 lb. 

 

Smith Barney agrees with cost issues that jp morgan sited.  Yet, they also feel that operating margins will increase.  Feels that these costs are not unique to Alcoa, and that they will journey through them.  They also contend that aluminum is a late-cycle metal.  The price increase in aluminum to 0.82 from our august 31, 2004 commentary should help margins.

 

Argus has a hold on the company.  They forecast F2004 $1.65 and F2005 $2.55.  They are concerned of a 4ht quarter earnings miss. 

 

Morningstar discusses challenges in the industry.  They site volatility of commodity prices.  Their fair value is $26. 

 

August 31, 2004

 

Bonds are rated A2/A- (Upper Medium Grade).  The bond rating according to a spreadsheet i was keeping on 2/18/03 shows that it was previously A+.  The 2010's which we quoted in 2/18/03 are yielding around 3.96%, priced at 117 and change.  The 30 year corporates on AAA are yielding around 5.50%.  the 30 year treasury is yielding 5.375%.

 

Long Term debt to capital has been reduced to 35.7% in F2003. this was previously 45% n F2002.

 

Depreciation is around $1.41 per share projected per VL at 12/31/04

 

Operating margin is 9.2% at fiscal 2003, it is expected to be 13.6% in F2004.

 

Gross profit margin was 20.3% at F2003.

 

Net margin was 4.8% in F2003 and expected to be 7.9% in F2004

 

LME spot price is .7673

 

It is our understanding that concerns for Alcoa investment would be slowdown in global auto sales, slowdown in aluminum consumption because of high oil prices, rebounds in Chinese Aluminum output, price of aluminum, higher interest rates could hurt demand, excess industry smelting or refining.

 

We have read that spot price > $0.80 would have an obvious drive on earnings.

 

There are various labor disputes at Becancour and Wenatchee, which if long in duration can further erode eps.

 

We have read that a one cent change in Aluminum price, will have  an EPS impact of $0.08 per share.  This is based on a base LME of around $0.761.

 

 

 

 

 

 

 

 

February 18, 2003

 

Bonds have stayed relatively strong.  The 2010's are yielding about 4.70 %.  This is similar to the yields in November 2001.   Expected cash flow per Merrill is 2.80 per share, less capex of 1.20 (we are using 1.40) and dividends (including minority interest) of 0.90, leaving 2003e free cash flow at approx. 0.70 per share.  Projected LME spot price for 2003 ests are 0.64 (up from 0.61 in F2002) and projected F2004 of 0.72.  Merrill expects gross margins of 22.0 %, up from F2002 of 19.80 %, and same as F2001.  Operating margin expected at 9.80 %,  up from F2002 of 6.30 % and F2001 of 8.90 %.

 

Look for Alcoa to try and reduce debt levels.  Depreciation is approx. 1.38 per share. Long term debt / Total capital is 45.0 % for F2002, up from 38.20 % in F2001.

 

The following are four catalysts that we read could help Alcoa achieve positive results quicker than anticipated.

 

    1.    Asset sales could generate debt reduction.

    2.    Cost reductions can exceed goals.

    3.    favorable commodity prices and a weak dollar.

    4.    competitor setbacks.

 

With the current price at 20.05, we see a moderate PEG, yet what appears to be a fairly inexpensive PEGY. 

 

 

 

 

November 27, 2001

 

Price is 38.28. Merrill reiterated buy today.  Merrill said the following :

 

“We believe that the outlook for aluminum remains positive with inventories

having leveled off at modest levels in October, and are now declining.

 Aluminum production remains constrained by about 2.0 million metric tons

(mmt) because of low water levels resulting in shortages of inexpensive

hydroelectric power. About 1.6 mmt has been closed in the U.S., about 6%

of global supply.”

 

Bonds stay relatively strong