Legendary Hedge Fund managers bet on Alcoa Inc. (AA, Financial), one of the world's largest producers of aluminum and alumina.
At the first trimester of the year, Daniel Loeb initiated the new position with 2.5 million shares worth $87.5 million considering the mean of the price range $34.99. Caxton Associates (Trades, Portfolio) is in second place with a new position containing 690,000 shares. In third place, Steven Cohen (Trades, Portfolio) purchased 539,300 shares while Leon Cooperman (Trades, Portfolio) did the same with 200,000 shares. Further, Jim Simons (Trades, Portfolio) boosted his position to 3.5 million shares and Stanley Druckenmiller (Trades, Portfolio) to 1.37 million shares.
Alcoa's revenue growth was based on higher shipments and the ability to maintain margins despite lower pricing. Looking forward, it is probable that demand improves from cyclical lows, so there is a potential for more earnings growth. Let's take a look at the positive trend in the period:
Alcoa reported net income of $75 million in the second quarter, or 40 cents on a per-share basis. The profit was below the previous quarter, in which net income reached $225 million, or $1.21 per share. That trimester accounted a $120 million gain from the sale of the Yadkin Hydroelectric Project. Excluding special items, adjusted net income rose to $116 million, or 62 cents per share.
Relative Vvluation
Regarding valuation, the stock sells at a trailing price-earnings (P/E) of 43.16x, trading at a premium compared to the industry. To use another metric, its price-book (P/B) ratio of 1.14x indicates a discount versus the industry median of 1.96x while the price-sales (P/S) ratio of 0.65x is below the industry median of 1.74x.
The stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $17,837, which represents a 12.3% compound annual growth rate. In the past 12 months, the stock has surged more than 40%.
Final comment
Considering a positive scenario for aerospace and automotive markets, the company has plenty of room to increase profitability further. The company itself has a better forecast for global aluminum demand growth in the range of 4.75% to 5.25%.
The world's largest bauxite miner will generate strong free cash flow while improving fundamentals in both alumina and aluminum. Alcoa's portfolio focuses on value creation with emphasis on lowering operational costs with the potential of achieving significant earnings from power sales globally.
Disclosure: The author holds no position in any stocks mentioned
