Alcoa (NYSE:AA) printed black ink delighting investors and surprising analysts. Consensus was for red ink. essentially the market for aircraft grew enough to overcome beer can disappointment. But lets take a close look at some of the individual components and determine if this is really a blue chip or just yesterdays floozie with a run in her stockings.
- 9 percent drop in the realized price of aluminum and a 13 percent drop in the realized price of alumina, year-on-year. Hard to rejoice and see increasing wealth when the commodity price is dropping substantially.
- Capital Expenditure has dropped and much capacity which was marginal at best was closed. Nice work. But what about improvements and expansion. The emphasis seems to be on how much they have cut not how much they have added. Healthy vibrant propositions will be adding, expanding and growing in some fashion. Not present in the current scenario.
- According to Klaus Kleinfeld, Alcoa Chairman and Chief Executive Officer, “Performance rebounded strongly this quarter due to our proactive cash sustainability actions, our relentless focus on profitable growth, and stabilizing markets.” Buzz word city for the CEO. Exactly what is a cash sustainability action? Also what markets are stabilizing and what markets are you exiting.
- At the same time Alcoa is forecasting a world-wide global aluminum deficit and is forecasting global aluminum demand 2012 growth of 7 percent. That is absolutely critical to hit your numbers in the future.
- BTW short-term borrowings has sky rocketed, cash has dipped slightly but long-term debt has plunged dramatically. This means we need to see some refinancing and stretch out the debt payments.
- Oh wait a second do you think Alcoa is going cap in hand to the debt markets and trying to refinance. The story is so much better if a loss was expected but no wait a strong Q1 was printed making the future picture very cozy and bright. Hmm
Now compare to another formidable aluminium player. Rio Tinto (NYSE:RIO) who swallowed up Alcan. Of course Rio Tinto is much more diversified and does not seem to have the same legacy costs as Alcoa seems to be solving. Also in the money talks and b**sh*t walks department Rio tinto has a $100 Billion market cap and pays a 3.5% dividend yield. Alcoa is a puny $11 Billion market cap and only pays a 1.29% dividend yield. So when Klaus Kleinfeld speaks Rio Tinto may only listen with one ear.
George Gutowski writes from a caveat emptor perspective.
George Gutowski also spent much of his formative time lending money and he has to tip his hat to Alcoa on timing. This is the oldest trick in the book. N’est ce pas.
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