Q. I’m not sure what to make of Alcoa Inc. Should I keep its shares in my portfolio?
A. The world’s largest aluminum producer is expected to turn in record revenues for the next couple of years.
Global demand for aluminum is strong, even though that metal is not in as short supply as some other commodities. The company controls 13 percent of the world’s aluminum smelting, used in products that include soda cans, industrial turbines and aerospace components. Alcoa is, for example, one of the largest suppliers to Boeing Co.
Shares of Alcoa (AA) are up 36 percent this year following a 1 percent increase last year. Demand from jet manufacturers and global construction helped overcome weakness in its automotive business to boost net income 9 percent in the first quarter as sales increased 11 percent.
But the big news is Alcoa’s recent $27 billion bid for its Canadian rival Alcan Inc., with shares of Alcan rising on the news. To encourage Canadian regulators to approve the deal, which would change the configuration of the industry, Alcoa said it will invest as much as $7 billion at several Canadian plants. Last week, Alcan recommended that shareholders reject the deal.
Many analysts and shareholders like the deal as a way to add to the company’s clout, though some said Alcoa should put itself up for sale. Earlier this year, two Australian mining companies were rumored to be considering making a bid for Alcoa.
With all that going on, Alcoa shares currently receive a consensus “hold” rating from the Wall Street analysts who track them, according to Thomson Financial. That consists of two “strong buys,” five “buys,” 10 “holds,” one “underperform” and one “sell.”
Alcoa faces rising competition from countries such as China and Russia that are boosting their aluminum production. In particular, China may be able to meet more of its own industrial growth demands than was expected.
Under pressure to improve its efficiency, Alcoa announced last fall it would reduce its workforce by about 10 percent. While it has made acquisitions, it also has unloaded underperforming businesses to help boost its return on invested capital.
More Top Picks Best Noise Canceling Headphones For Toddlers
Earnings are expected to increase 10 percent this year versus 7 percent forecast for the aluminum industry. Next year’s earnings are expected to decline 4 percent, while the industrywide projection is a fractional gain. The company’s five-year annualized growth rate of 10 percent compares with nearly 9 percent for its peers.
———-
Andrew Leckey is a Tribune Media Services columnist. E-mail him at [email protected].