Look at this chart. Just look at it.
That’s not a fly-by-night penny stock — that’s the old and boring Alcoa (NYSE: AA), rising like a metal phoenix. In 2008, the stock was at $45.
AA got crushed along with the rest of the world during the Great Recession and has flat-lined for the last five years. But something interesting has happened to the world’s third-largest aluminum producer in the past few months: It has nearly doubled.
And there is reason to believe it will get better…
Less Competition
The world’s largest producer of aluminum is United Co. Rusal (HK: 0486), a Russian company that trades in Hong Kong. Old Rusal isn’t doing well…
The company just posted its biggest annual loss since 2008.
According to Reuters, Rusal’s net loss widened to $3.2 billion in 2013 from a restated $528 million loss a year earlier. Adjusted earnings before interest, taxes, depreciation, and amortization fell 29% to $651 million. The company is looking at a $1 billion debt payment this year and doesn’t know where to get the money.
The company says it has to restructure its debt or go into default. This is after it closed its most inefficient plants and slashed 3.9 million metric tons of annual production, writing down $2 billion of assets in the process.
Your Bones Sustain Me
Bull markets are built on bodies of the last bear market. A Rusal default will mark the bottom.
The price of aluminum has dropped from $1.40/lb. to $0.75/lb. and is getting close to the $0.60 rate it saw in 2009. Inefficient companies can’t compete when times get rough.
Rusal has cut production and may go out of business. This would be beneficial for the companies left standing…
Demand in the Wheelhouse
Alcoa will survive, as it will see an increase in demand from aerospace, automobile production, and its upstream commodity segment as the price bounces back.
Airplanes use a lot of aluminum, and Boeing and Airbus are selling a lot of airplanes these days. Alcoa says the long-term needs of the aerospace industry are expanding at the same time its inventory is diminishing. We are at the point in the lifecycle when companies need to place big orders to restock.
Autos
Ford has started making its iconic F-150 truck out of aluminum on a test basis, and Tesla makes its electric cars out of aluminum. This trend will continue with other automakers.
Alcoa predicts it will triple its sales to automakers by 2015. Revenue will grow from $160 million last year to $580 million.
And recently, Alcoa came out with the world’s lightest heavy-duty truck wheel. It’s 47% lighter than the standard and is made out of a new alloy called MagnaForce.
The Wheel, Reinvented:
That might not mean much to you, but it means a savings of 1,400 lbs. per 18-wheeler. This means better fuel economy that will help meet new federal emissions standards.
As you can tell by the chart, Alcoa has hit a 52-week high. The trend is up.
The company has a $13.8 billion market capitalization and a forward P/E of 21.15, which isn’t bad for a turnaround company. It has $1.44 billion in cash and $8.32 billion in debt, and it pays a forward dividend of 1.10%.
