Fundamental Fridays: Alcoa

In the second installment of Fundamental Fridays, TST will examine Alcoa.

Alcoa is a big time aluminum producer operating in 44 countries.  In the past 52 weeks, shares of Alcoa (Ticker: AA)bottomed at $9 and peaked at $44.77.  Shares closed yesterday at $11.20.  Wondering what to do with Alcoa?  Let’s see what the fundamentals have to offer.

Valuation measures

Note: This week I have added average ratios for the sector.

Price-earnings - Compares the current market value per share to the earnings per share.  P/E ratio for AA: 5.34, P/E industry average: 3.09.  P/E sector average: 1.51 Signal: OVERVALUED

Price-sales – Compares the current market value per share to the revenue per share.  P/S ratio for AA: 0.30 , P/S industry average: 24.4,  P/S sector average: 1.33   Signal: UNDERVALUED

Price-cash flow – Compares the current market value per share to the cash flow per share.  P/CF ratio for AA: 2.72, P/CF industry average: 1.84, P/CF sector average: 1.32   Signal: OVERVALUED

Some analysts use earnings or sales with the following formula to solve for a stock’s expected price.

Expected stock price = historical P/E average x Current EPS(1 + EPS growth rate) =  19.9 x 2.95 (1+0.3724) = $80.57

For AA, the 5 year P/E average is 19.9 (from ADVFN Financials), EPS from last year $2.96 (Reuters) and 5 year average EPS growth rate is 37.24% (Reuters), resulting in an expected stock price of $80.57.  The stock is currently trading around $11 per share.  Signal: UNDERVALUED

Profitability Measures 

Return on Assets – Net income relative to total assets.  ROA for AA: 5.18%, ROA industry average: 2.17%

Return on Equity – Net income relative to total equity.  ROE for AA: 11.27%, ROE industry average: 3.70%

Profit margin – Net income relative to revenue.  PM for AA: 6.84%, PM industry average: -18.63%

Bottom Line: Mixed bag on valuation, overwhelmingly positive on profitability.  

Ratios should always be evaluated relative to a company’s competitors, sector and industry averages to see how the company stacks up.  The data used is also pulled from financial statements which have been known to be subject to manipulation.

Based on the ratios used today, TST’s Fundamental Friday Recommendation for Alcoa: BUY