AA: Alcoa for the Investor

Like Phelps Dodge and INCO, Alcoa is the last of its kind. Alcoa is to Aluminum what Phelps Dodge was to copper and INCO was to nickel. Unlike those two, and many more recent departures in the metal mining space like Western Mining, Noranda, and Falconbridge, Alcoa does not appear to be headed for a merger, so no apparent buyout premium appears in its immediate future. However, like those two and many more, there is a constantly growing demand for what Alcoa produces, a demand that is unlikely to diminish until the thirst for a higher standard of living by billions of people in China, India, South America, and Africa is quenched. And there's no real substitute for aluminum in many of its forms and uses. It's the light, strong, useable and relatively inexpensive metal. Alcoa currently has a price 16.6 times its trailing earnings and 11.7 times its forward earnings. Its highest price in the past 12 months has been $48.77 some 14% above its current price of $42.74. It's yield is 1.6% and its growth in earnings is currently expected to be 11% this fiscal year and 24% next year (its fiscal year ends in December). Since mid-February of this year its estimated earnings for 2008 have increased by 7.0%, from $2.70 to a current value of $2.89 per share, and its estimated earnings for 2009 have increased 14.8%, from $3.18 to a current value of $3.65 per share. Its share price has increased 18.6% but still is only a 14.9 multiple of 2008 estimated earnings and 11.9 times 2009 estimated earnings. It appears likely that Alcoa's earnings will continue to grow as the price of aluminum keeps pace with demand. Estimates for both 2008 and 2009 earnings will probably rise in each of the remaining quarters of 2008. Costs will also rise due to rising energy prices but Alcoa is positioned better than most of its competitors to deal with costs. Alcoa is vertically integrated, it mines and refines the ore, produces the intermediate alumina, and sells both alumina to other aluminum companies and finished aluminum products to users. Upward revisions to estimated earnings in each of the following quarters of the 7% revision seen in the first quarter is probably too much to be expected (a compounded total of 23%), but half that amount does not appear unreasonable giving 2008 estimated earnings 11% higher or $3.21 per share and year over year growth of 23%. That growth rate would justify a higher PE, say perhaps 17 to 18. At a PE of 17 and earnings of $3.21 the share price would be $54.57. A more conservative target price of $53 per share appears reasonable by the end of 2008.