Alcoa (NYSE:AA) has been beaten up and slammed so many times it’s hard to remember what it was like when it was in favour. The latest indignity for the aluminum giant was being kicked out of the Dow 30 causing a lot of index funds to sell.
The removal from the Dow 30 may become the silver lining in the coming year. If you believe the market will
correct no make that crash in the near future Alcoa would have been a huge sell as index funds sell off and rebalance themselves. This will not be a factor for Alcoa.
The dividend looks very suspect at this point. In God we trust all others pay cash begs the question where will Alcoa source the cash-flow to pay dividends.
Commodities are a very tough gig. Pricing cycles are treacherous and unforgiving. Alcoa has a market cap of about $8 Billion and has been ruthlessly rationalizing cost structure.
There are two significant paths available. Integrate backwards and buy an energy company to mitigate the high cost of hydro power needed to make aluminium. Or be bought by someone who wants secure access to product without relying on a Goldman Sachs (NYSE:GS) warehouse.
Who uses aluminium cars in great quantity and feels aggrieved with the warehouse tribulations. Oh and the last filter is a large cap that can easily swallow Alcoa. Here is the list of suspects:
Coca Cola (NYSE:KO) 168 billion market cap
Pepsi (NYSE:PEP) 123 billion market cap
Budweiser (NYSE:BUD) 159 billion market cap
Any of these guys could swallow Alcoa, not care about the dividend, absorb the tax loss carry forwards, reduce packaging costs, control supply chains, protect American based jobs and not really notice the capital that it would take to pull the caper off.
So let the stock drift down. Pretend its old school commodities without a secure future. With a few more sell recommendations and some adverse general market moves we can easily see $5 @ share. Then just bide your time and wait for the surprise strategic move.
George Gutowski writes from a caveat emptor perspective. Follow him on Twitter @financialskepti