Alcoa: Sequoia-Like Growth

03/22/2016 8:00 am EST


Briton Ryle

Editor, The Wealth Advisory

The true secret to getting wealthy in the stock market is deceptively simple: Buy solid, dividend-paying stocks, and reinvest those dividends, asserts Brit Ryle, editor of The Wealth Advisory.

Alcoa (AA) is the granddaddy of aluminum companies. Founded in 1888, it’s been leading the industry for one and a quarter centuries.

The firm has a strengthening balance sheet and it has become a leaner company in a depressed market. The company will split into two separate parts; the firm is on track for separation in second half 2016.

The "upstream" business segment will remain with the parent company; this operation produces and sells aluminum plates, sheets, and foils, as well as rigid container sheets for food and beverage packaging markets.

The "value-add" segments will be spun off into a new entity. These businesses include engineered products such as titanium and super alloy; rolled products, such as plates, sheets, and foils; and construction solutions, which delivers architectural systems and aluminum parts for commercial transportation.

Experts projecting global demand growth of 6% and supply deficits in 2016. The firm has narrowed its cash and debt gap. Operating margin of 3.3% versus 1.3% for the industry suggests strong profit-making ability.

I expect to see some downward pressure directly after the spinoff as portfolio managers and active investors rebalance their asset allocations, but that should be short-lived.

I see a bright future for both the value-add and upstream businesses as Chinese production and smelting slows and global demand for aluminum products continues to grow.

Alcoa is kind of like the giant sequoia trees in California. It’s huge, over a century old, and still growing strong. So, I’m happy to keep my "buy" rating on Alcoa with a limit entry price of $10 and a 12-month target of $19.

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By Brit Ryle, Editor of The Wealth Advisory

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