The Razor's Edge
2-Year Price History
Recent Price
(1/7/2009)
$10.89
52-Week Price
$6.80 - $44.77
Market Capitalization
$8.7 Billion
Most Recent Dividend
$0.68
About Alcoa, Inc.
Alcoa, Incorporated is considered to operate in the Basic Materials
sector. They specifically operate in the Aluminum
business segment contained within the Metals & Mining industry.
The Company is engaged in the production and management of primary aluminum, fabricated aluminum and alumina combined, through its active and growing participation in all major aspects of the industry.
A Word Of Caution
Alcoa, Incorporated (AA) has experienced a very significant loss in market value recently. Clearly this drop in price will have an impact on the valuation but the recent events that caused the drop may have not been fully factored into our analysis yet. When a stock loses value very quickly it could be a sign that there is a fear of bankruptcy.
Of course, you may proceed to review our research report for this security, but please be aware that our model may not reflect significant factors surrounding this company.
Therefore, (and as always), check additional sources and available information regarding AA before making an investment decision.
Ockham's Rating
The rating for Alcoa, Incorporated (AA) is unchanged this week as we reaffirm our Greatly Undervalued rating. We have maintained this position since it was upgraded to this rating in the report written on 09/27/2008. AA had been rated Undervalued before 09/27/2008. While this is a reaffirmation of our Greatly Undervalued rating, we would like to highlight some of the important changes in price and earnings expectations for AA.
Starting with the basics, the price of AA rose from $9.78 as of 12/27/2008 to a price of $12.11 as of 01/03/2009. This increase does reduce the attractiveness of AA, but an increase of 23.82% is not substantial enough to warrant a downgrade at this time.
Also, there have been no meaningful adjustments in earnings expectations to report in the last week.
AA Stock Evaluation
In this week's report, we are reiterating our Greatly Undervalued rating on AA. In the last week there has been no revisions made to earnings expectations, but our valuation has obviously been influenced by the increase in price of 23.82%. While that price increase has not caused a downgrade this week, we will continue to closely monitor the fundamentals in case a future change in rating is warranted. The complete fundamental analysis of AA follows below.
AA Revenue
As we have often noted, in our valuation methodology, "Cash is King." Well, it goes without saying that if a company cannot produce sales then there is no ability to generate cash flow. By that logic we look very closely at revenue numbers as our second most important factor in valuing a company's stock. We have established reasonable Price to Sales per share ranges based on historical data of the last 10 years. For, AA the high and low end of the Price to Sales per share ratios are 1.33x and 0.80x respectively.
Notice that AA's current Price to Sales per share ratio is 0.32x, which is quite a bit below what we consider a normal Price to Sales ratio for this stock. Given normal conditions and a price of $12.11, AA is 71% below where we would expect to see it. This will beneficially factor into our final analysis of AA as it is not often that this stock sinks to these levels.
AA Cash Earnings
Cash Earnings is always one of the most important factors to review for a company and, more importantly, an investment in a stock. AA is significantly below their historical average multiples of Cash Earnings, as calculated by our proprietary analysis. It is incredibly important to understand that for AA, the current level of Cash Earnings compared to its historical levels helps identify where AA is in relation to what the investing community was willing to pay for this level of Cash Earnings in the past. With a historical high Cash Earnings per share ratio of 12.53 and a historical low Cash Earnings per share ratio of 7.47, an investor can relate where value becomes optimal.
So what does "significantly below" mean when we talk about Price to Cash Earnings numbers for AA? From the Ockham perspective, we are looking specifically at AA to see if the market is recognizing the huge disparity between AA's past stock price to Cash Earnings ratio to today's levels. At a difference of 78% below the average historical Price to Cash Earnings ratio, our view would be quite positive at this point. However, as with all metrics, we need to also take other factors into account when looking at AA. While we view better Cash Earnings metrics as very important, if the market is slow to identify this value, or if Cash Earnings were to fall from these levels, we would become more neutral in our stance.
AA Dividends
A strong dividend payment history is looked upon as a favorable characteristic on a company’s future and potentially can receive a positive Ockham rating. That being said, we don't require dividend payments for company's whose management has elected to forgo them entirely.
When reviewing dividend yields for AA, we compare the historic high and low levels over the past, which is similar to our evaluation of Sales and Cash Earnings per share. Paying a dividend is not necessary for any company, but changes in dividend often can lend clues as to the health of the business. A rising dividend is a strong sign for an established company, as it reflects management's confidence in the company. AA’s estimated annual dividend is $0.68 resulting in a current dividend yield of 5.62%. The highest dividend yield from AA over recent history was 10.00% while the lowest dividend yield was 1.15%. AA has shown confidence by hiking up the dividend yield to 0.81% above the historical median.
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