Should You Buy the Dow: Alcoa

Today, Ill look at Alcoa (NYSE: AA ), the venerable company known for aluminum
products since 1888. Alcoa operates in four segments: Alumina, Primary Metals,
Flat-Rolled Products, and Engineered Products and Solutions. The Alumina segment
engages in mining of bauxite, which then is refined into alumina. The Primary
Metals segment produces aluminum. The Flat-Rolled Products segment engages in
the production and sale of aluminum plate, sheet and foil. The Engineered
Products and Solutions segment produces and sells titanium, aluminum and super
alloy investment castings, hard alloy extrusions, forgings and fasteners,
aluminum wheels, integrated aluminum structural systems, and architectural
extrusions. One of the key driving factors regarding Alcoa is the price of
aluminum, which is tied to multiple economic crosscurrents affecting supply and
demand. So, serious investors should do their due diligence in this area. If you
are considering investment in Alcoa, you are banking on one primary assumption:
that the world will continue to use aluminum. Most analysts in the arena not
only believe the answer is affirmative, but agree with Novelis Chief Strategy
Officer Erwin Mayr that aluminum usage will grow . Indeed, stock analysts
looking out five years on Alcoa see annualized earnings growth at an astonishing
36.4%, with the primary driver being net income soaring 125% over last year.
Beyond that, analysts project 14% growth annually thereafter. At a stock price
of $11.50, on FY 2011 earnings of $1.21, the stock presently trades at a P/E of
9.5. There are no competitors to which we can truly compare Alcoa. So, at first
glance, Alcoa appears undervalued on both a near-term and longer-term basis. We
always want to look at financials, though. The company carries $1.26 billion in
cash and $8.77 billion in debt at an interest rate of about 6.2%. Trailing
12-month cash flow was $1.36 billion, so the debt service is no problem. The
company also had three times the amount of free cash flow necessary to pay its
1% dividend. So Alcoa appeara to be on solid footing financially. There have
been three insider purchases of about 12,500 shares in the past year. Thats not
a huge endorsement, but it is better than nothing. Conclusion Placing a 14 P/E
on Alcoa, with projected 2015 earnings of $2.04 per share, gives us a price
target of $28. Alcoa certainly looks cheap today, too, giving a margin of error
on that 14% growth rate. That margin of error is large enough that retirement
accounts arent exposed to significant capital depreciation risk. I believe Alcoa
is a buy for regular accounts. I believe Alcoa is a buy for retirement accounts.
Lawrence Meyers does not own shares of Alcoa.