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April 11, 2012

Stock of the Day

Recommendation: Strong Sell

Welcome to the Stock of the Day for April 11, 2012. Today is the second day of first-quarter earnings season, so today, we're going to take a look at Alcoa Inc. (AA), the aluminum producer that marks the unofficial start of earnings season.

Company Overview: With over 120 years of experience under its belt, Alcoa Inc. is considered the world's leading integraded aluminum company. The company has dozens of individual businesses spread across five key segments: Primary Metlas, Flat-Rolled Products, Engineered Products and Solutions, Alumina and Other. Through these businesses, the company brought in $25 billion in sales last year. Alcoa Inc. employs 61,000 worldwide in over 200 locations across over 30 companies.

Industry Breakdown: There are 36 companies in the Aluminum industry. Of those, Alcoa Inc. is no. 5 in terms of market cap. Most notably, the company is ranked third in terms of its annual dividend yield (1.3%) and fourth in terms of its long-term growth rate (20.4%). In addition, the company's Price/Earnings to Growth ratio is sixth highest in the industry. However, this company has middle-of-the-road sales growth (20th) and retrun on equity (15th). Alcoa Inc.'s main competitor is Aluminum Corporation of China Ltd. (ACH), and Alcoa outperforms its rival in terms of operating and gross margin, but falls short in terms of sales growth.

Earnings Buzz: Alcoa Inc. kicked off earnings season on the right foot by posting better than expected bottom-line performance for the first quarter. Compared with the same quarter last year, net income did dip from $308 million, or $0.27 per share, to $94 million, or $0.09 per share. However, excluding the impact of special one-time items, adjusted net income weighed in at $105 million, or $0.10 per share. Meanwhile, analysts expected Alcoa to post a loss of $0.04 per share, so the company trounced estimates. Over the same period, sales climbed 1% to $6.01 billion; this also topped the $5.77 billion consensus sales estimate by 4%. Looking ahead to the rest of the year, management expects 7% growth in global aluminum demand, compared with 10% growth in 2011.

Current Ratings: Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. Over the past 12 months, this stock has stayed pretty firmly in sell territory. Its fundamentals are mediocre; while operating margin growth and cash flow receive decent marks, the other six fundamentals are quite weak. Above all else, what has kept this stock down is its abysmal buying pressure. For this reason, AA is an F-rated stock.

Bottom Line: I consider AA a strong sell. If you hold this stock in your portfolio, you should find a good time to cut ties with it.

Sound Off: What do you think about AA? Are you a buyer at current prices? Let me know what you think by posting on our wall on Facebook.

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