Is It Safe? Alcoa's Mettle Tested Abroad

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Alcoa (AA), the largest U.S. aluminum producer, posted a first-quarter net loss that was about seven times that of the whole of 2008.

The loss was $497 million as sales plunged 36% to $4.1 billion. The global economic recession took its toll on commodities companies as demand for cars, planes and other goods that require metals slumped.

Alcoa, of course, will eventually climb back to profitability. The questions are when and at what growth rate?

Analysts estimate Alcoa, after losing $1.03 a share this year, will earn 37 cents in 2010. But fast growth will be required to justify the stock's price-to-earnings ratio of more than 25 times next year's estimated net income.

Aluminum is begging for sales. The price of the lightweight metal has fallen by more than half to less than 60 cents a pound this year on the London Metals Exchange. As a result, the company's stock has fallen 77% in the past year.

As a model cyclical company, Alcoa's return to profitability will likely correlate with the economy's rebound. Investors must decide if we're in store for a quick-and-decisive V-shaped recovery, a prolonged U-shaped trough followed by a modest expansion, or an L-shaped future with prospects of uncertainty.

Hopes for an economic recovery were boosted Thursday by a report that said the index of U.S. leading economic indicators rose in April for the first time since June. The gauge's 1% gain was the biggest advance since November 2005.

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