Stock of the Day
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Alcoa (AA)
Time to Recycle Alcoa Stock?
Of the 30 companies tracked by the Dow Jones Industrial Average, Alcoa was the first to report their Q4 2008 earnings. Many investors were expecting to hear dismal results, but the company's report was well below expectations. This is the first time in six years they have reported a loss. Last week, a press release stated the company would make strategic moves to prevent further declines. With so many negative factors threatening to rip apart the aluminum giant, what is being done to prevent 2009 from becoming their last year in business?
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| Stock Analysis |
Alcoa announced a loss of $1.2 billion or $1.49 per share. Compared to last year, it earned $632 million or 75 cents per share. This significantly missed analyst expectations at Thomson Financial, who were expecting a loss of 10 cents per share. This was primarily due to a decline in sales. However, restructuring, impairment and special charges also hurt the company. The price of aluminum, which has been diminishing consistently since July, also contributed to the outcome.
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Among the strategic moves announced last week was changes to its staff. They will be cutting 13,500 jobs and an additional 1,700 independent contractor jobs. Alcoa is reducing output as well. Specifically, they aim to produce 175,000 fewer metric tons of aluminum. This reduction may result in a small increase in the price of aluminum, but because demand is down proportionately, it may do little more than slow the declining price of the commodity. Another strategic goal was to reduce capital spending by 50 percent. This builds upon a previous announcement to halt their share repurchase program. The last initiative, and probably the most important one for investors to keep an eye on, is the selling of company assets. Aside from asset liquidation being an inherently difficult way to create value, the company may decide to sell an asset that investors may have felt contributed to shareholder value. If this is the case, it will be value destruction.
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Even with all of these initiatives taking place, the economic storm will continue to pummel the stock price. However, the positives for Alcoa exist not with a potential change in the global environment, but with the company's balance sheet and leadership relative to the rest of the industry. They still have $762 million cash on hand and expect to have minimal debt due in 2009. Without having to pay off a large amount of existing debt, the company remains relatively liquid. Also, competitors Rio Tinto (RTP: Charts, News, Offers) and Norsk Hydro will go through changes in management which may result in a period of uncertainty while the new leaders become better oriented to their respective positions. Because Alcoa already replaced their CEO in May 2008, they are in a better position to focus on business operations than worry about the effects of leadership changes affecting the company. Furthermore, employees do not need to worry about adapting to new changes brought in by new management.
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Thus, the gamble for investors today lies not with whether or not to invest in Alcoa, but whether or not to invest in a company trading in this industry. While the economy is experiencing a downturn, aluminum prices are following suit, and downward pressure is applied to all mining and producing stocks. If the economy reverses suddenly, so too should share prices. Unless investors are planning to hold Alcoa for a short period of time or the economic situation results in the unlikely event of a bankruptcy, this could become a potentially rewarding bet in the future.
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Profile |
Click here to view a detailed profile of Alcoa.
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