Thought you all might enjoy this article from Business Week, 20 April 98. It pretty much called the start of the AA run which kicked off in Feb 99 or so. Stock has had one split since this was published. Regards,
ALCOA FORGES STRONG LINKS
Metals have yet to shine in this raging bull market, but investment manager Ed Wachenheim III is counting on one producer to score big: Aluminum Co. of America (AA). 'The Street has ignored Alcoa because it's misperceived as just a plain cyclical stock,' says the CEO of Greenhaven Associates, a New York investment firm that has accumulated 1.3 million shares of the largest aluminum producer.
The stock has been lackluster, skidding from 89 last summer to 68 on Apr. 7. But Wachenheim says he finds it exciting. What gives?
'In reality, Alcoa could be regarded as a growth stock--it has many of the characteristics of a high-quality growth company,' he explains. And yet its shares trade at a price 'typical of a low-quality cyclical company whose earnings are cyclically weak,' he says
Here's why Alcoa deserves more respect: It produces large cash flows even when aluminum prices are soft. Last year, prices were weak, yet Alcoa's cash flow from operations rose to $1.8 billion, or $11 a share, from $1.2 billion, or $7.35, in 1996.
That has enabled Alcoa, Wachenheim notes, to buy assets at bargain prices. Recently, Alcoa paid $410 million for Inespal, a Spanish aluminum producer formerly government-owned. Inespal's replacement value: $2.5 billion.
Alcoa also has agreed to acquire No.3 Alumax, creating a company with $17 billion in annual revenues and aluminum output of nearly 4 million tons. Alcoa projects revenues will climb an average 15% a year, from $13 billion in 1997 to $20 billion by 2000.
Wachenheim is also impressed with Alcoa's earnings: In 1997--with ingot prices in London averaging only 73 cents a ton--Alcoa posted diluted earnings of $4.62 a share. This year, assuming ingot prices stay at 65 cents to 70 cents a ton, he estimates earnings will rise to $5.50. But next year, with Inespal and Alumax earnings kicking in, he sees profits jumping to $1.8 billion to $1.9 billion, or $10.50 to $11 a share, based on ingot prices of 85 cents a ton. He says Alcoa deserves a price-earnings ratio of 12 to 13, or a price of 125 to 140 a share.
BY GENE G. MARCIAL |
