
Alcoa Is a High-Risk, High-Reward Buy
Alcoa (AA) - Get Report , the largest aluminum producer in the U.S., has suffered from weak aluminum demand and low prices caused, in part, by China dumping the product on the market. This is why the company's split into two companies is such a big deal.
New York-based Alcoa's tax-free split, expected to be completed in the second half of this year, would leave shareholders with shares of Arconic, the company that will make aerospace and auto components, and shares of Alcoa, with its traditional business mining bauxite and producing aluminum.
TheStreet's Jim Cramer has long lauded Alcoa, CEO Klaus Kleinfeld and the prospect of the split. He recently called Alcoa a "high-risk, high-reward investment" because while Alcoa stock can be volatile, the "split will be valuable to shareholders over the long term."
Alcoa reports first-quarter earnings Monday. Analysts, on average, expect it earn 2 cents per share on revenue of $5.14 billion, compared to a year ago when earnings were 28 cents per share on revenue of $5.82 billion. For the year earnings are projected to decline 42.8% year over year to 32 cents per share, while revenue of $21.01 billion would mark a decline of 6.8% from the year-ago quarter.
Shares, at $9.50, are off 3.8% for the year to date and nearly 28% for the past 52 weeks despite Alcoa working to exit low-margin businesses while increasing the use of its products in aerospace and automotive, such as Ford Motor's (F) - Get Report pickup trucks. To that end, Alcoa has also been making a number of acquisitions.
That's why now's an ideal time to buy the stock because, as Cramer said, it's more about the long term after the split. Based on fiscal 2017 estimates of 52 cents per share, Alcoa stock is priced at just 18 times those estimates. While that may be a couple of points higher than the forward price to earnings multiple of the S&P 500 (SPX) index, it also signals earnings growth of 62.5% above 2015 projections of 32 cents per share.
What's more, in 2017 Alcoa is expected to deliver full-year revenue of $22.01 billion, which would mark a rise of almost 5% from 2016. So Alcoa is poised to become a solid bounce-back candidate at the start of next year. Investors looking for a cheap stock with the potential for market-beating gains in the next 12 to 18 months can do well here.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.









