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Analysis on Alcoa Inc (AA)

August 30, 2012


Alcoa Inc. is one of the world’s largest producers of primary aluminum as well as one of the world’s largest suppliers of alumina, raw material used to make aluminum. The closing price for the stock of Alcoa Inc. as on Aug 29, 2012 is $8.54. In this analysis, we are not considering just 52 weeks history, we are  considering 5 years history as well. The purpose to consider 5 year’s history is to accommodate the lows and highs  of the business cycle.

Stock Exchange Info

Alcoa is listed in Dow Jones stock exchange with ticker AA. It falls under sector Material and industry Aluminum.

Industry info

Aluminum Industry is going through bad times. The aluminum spot price 5 years before was $1.15, 5 year high is $1.45, 5 years low is $0.55 and current is $0.84. If we assume that the normal spot price is the mean of high / low of 5 years, e.g., $1.00 and is normalized to current period, the current spot price is 28% lower than the normal price.

Historical Analysis

If we look at the 52 weeks pricing trend, low is $7.97 and high is $12.93.The current price is towards the lower side based on 52 weeks price range. If we look at the 5 years pricing trend, low is $4.97 and high is $43.75 ,the Current price is again  towards the lower side based on 5 years price trend.

Volume Analysis

Average daily volume is 11.4M shares, which is equivalent to $97M based on the current price. This means that the average $97M deal completes in one day. This can be considered highly liquid.

Options Price Analysis


Valuation of the stock

The liquidation value is $6.08, which is $2.46 lower than the current price. Value of the stock based on the cash flow is $3.59.

Risk / Opportunity

Risk  vs Opportunity ratio may be defined as the comparison between the strength of the opportunity and the risk involved in the investment.  For AA, the opportunity is 7x of the risk based on 52 weeks analysis and 10x based on 5 years analysis.

Price Earnings Ratio

Price Earning Ratio for AA is  lower than the aluminum industry.


Based on the above analysis, it is worthwhile to invest in Alcoa Inc. (AA). The value of the investment is less risky than the opportunity available.

|By Gulshan Malhotra|

  1. Tai permalink
    August 30, 2012 1:36 PM

    Thanks for the information Gulshan. The analysis was helpful.

  2. Pio permalink
    August 30, 2012 6:24 PM

    Here’s a link on the outlook of aluminum prices
    This justifies your entry point in AA…all the best

  3. Dave permalink
    September 12, 2012 4:17 PM

    What time horizon would you use for tis investment? I’m confused by the risk/oppotunity section, can you elaborate on it? What is the opportunity for growth? Is there key industries (auto, consumer electronics, construction) that will drive growth and what is the prospects for those industries?

    • September 13, 2012 3:20 AM

      Hi David,

      1. My theory recommends long term investment, which I will say in Alcoa it is 3 years. On Alcoa, you can expect an annual return of 20%.

      2. I will bring some more visibility by showing in chart in my next article which will be published by upcoming week end.

      3. The main driver for Alcoa growth is the spot price of Aluminium. I have selected Alcoa as a way to invest in Aluminium. Among the basic sector, Aluminium Industry Price / Book value ratio is low, which mitigate the risk and Price / Earning is high, which indicates that investor expect high growth in aluminium industry.

      If you need any further information, let me know.

      Thanks for your comments.

      Gulshan Malhotra

      • Dave permalink
        September 17, 2012 4:25 PM

        Thanks Gulshan.

        Alcoa is trading at 167 times earnings (which I believe is too high for any stock) – will changes in aluminum pricing not just decrease the PE to a reasonable level (like PE of 25) and hold the stock price where it is?

      • September 18, 2012 10:38 AM

        In my opinion, PE is not a very stong creteria to assess any stock. In case of whole aluminium industry, PE is 138x. PE for whole industry / AA is down, since their earning droped. But investor are willing to pay price based on high PE, since they believe there is a future growth for industry / AA. This is a another positive indicator rather than a risk.

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