Book Profits in Alcoa's Stock Now, Before Aluminum Prices Weaken

This company is on a tear, but investors should pocket their gains while they can, because challenging times lie ahead.
By Chiradeep BasuMallick ,

Aluminum company Alcoa (AA) - Get Report  is riding high, with shares up nearly 9% this year and a solid second-quarter earnings report, but more challenging times lie ahead for the company, so it is an opportune time for investors to pocket gains.

The weak outlook for aluminum demand projected by Alcoa itself leaves little room for further upside, and there are better and safer ways to earn profits. The prudent move for investors is to cash in their Alcoa chips right now and not wait for further gains, which could prove elusive.

After losing more than 37% of its value in 2015, Alcoa has enjoyed a solid year, rising near the year-earlier levels of $10 to $11 a share.

But though Alcoa's second-quarter earnings beat was impressive, the stock appears to have run its course for now.

The aluminum commodity business is under pressure, amid a global economic slowdown. Global aluminum supply has yet to start outpacing demand.

For the third quarter, Alcoa expects lower demand from China and the global aerospace industry, two crucial consumers of aluminum. The company also forecast a decline in commercial transportation build rates, as well as weaknesses in the North American heavy-duty truck market.

This confluence of trends should put a cap on the stock price and the company's earnings.

Alcoa recently said that its plan to break up into two separate, publicly traded companies, Alcoa and Arconic, this year remains on track, but it isn't a big source of optimism for the stock. The split is designed to boost Alcoa's stock by segregating the upstream smelting and refining business, hobbled by low commodities prices, from the more promising value-added downstream manufacturing operations at Arconic, which will engineer aerospace and automotive parts.

But analysts don't expect the split to significantly boost Alcoa's stock.

What's more, the lackluster guidance from Alcoa for the current third quarter could reignite investor concerns about the company's full-year earnings projections.

As for Alcoa's cost-cutting initiatives, though results are starting to show, as of now they seem priced into the stock.

At a five-year expected price-earnings-growth ratio of 3.02, Alcoa is now comparatively expensive. Rival Aluminum Corporation of China has a negative PEG ratio and smaller peer Kaiser Aluminum has a PEG ratio of 0.95.

Another reason to unload Alcoa after its recent capital appreciation is its paltry dividend. Investors should look elsewhere for reliable income.

The 1.12% dividend yield dividend yield is less than the 10-year U.S. Treasury yield. There has also been no payout increase for at least the past five years, with the dividend remaining at 12 cents.

Sell Alcoa now, while it is riding high and before its flaws catch up to the stock price.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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