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Is It Safe? Alcoa's Mettle Tested Abroad

Alcoa's fortunes are tied to the global economy, though the company lags behind its larger rivals outside the U.S.

TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.


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, 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?

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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.

As a kicker for Alcoa, President Barack Obama's ambitious mileage requirements for cars will mandate the use of lightweight materials, which will result in additional use of aluminum in car construction.

Alcoa has taken forceful measures to assure its survival until the economy picks up. The company bolstered its balance sheet with $1.4 billion in new shares and convertible notes. Despite its depressing first-quarter financial results, Alcoa ended the period with $1.1 billion in cash, partly by slashing its quarterly dividend to 3 cents a share from 17 cents.

The company also made more conventional cost cuts such as trimming capital spending, reducing headcount, freezing salaries and dumping less-promising ventures.

With 47% of its sales outside the U.S., Alcoa's revenue is geographically diversified. The company stands to gain if the recent weakness in the U.S. dollar continues.

However, with only 15% of its sales in Asia-Pacific, Alcoa is at a disadvantage in that fast-growing region, which includes manufacturers and consumers in China. Larger rivals

BHP Billiton

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Rio Tinto

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dominate the area. And Rio Tinto became the world's largest aluminum producer when it outbid Alcoa for Alcan in 1997. Alcoa's challenge is to take its rivals head-on in emerging markets, where its fate will be met. Ratings gives Alcoa a C-minus, which equates with a weak "hold" recommendation.

Richard Widows is a senior financial analyst for Ratings. Prior to joining, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.