Alcoa: Execution is Key

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For the past two years I’ve received several emails from disgruntled readers who took issue with me saying publicly that Alcoa (NYSE:AA) is not a bellwether. I very much still stand by that comment today but those readers may find some comfort in knowing I’ve become a bit more constructive on the outlook for the company. However, execution will be key.

So why isn’t Alcoa a bellwether in my eyes? Well, for one thing the stock has been stuck in quicksand since Klaus Kleinfeld was named CEO/Chairman in May 2008. At that time, the stock was trading at ~$35 per share. As you can see from the historical chart below compliments of Yahoo! (NASDAQ: YHOO), Alcoa investors haven’t had much to cheer about in recent years yet. Considering that other commodity markets/players have more than doubled in recent years, Alcoa to me is simply not a bellwether since bellwethers lead, not whimper. What other bellwether do you know that says it has been through “choppy waters” in recent quarters? I can’t help wonder if some investors will suffer bellwether withdrawal if that bellwether label moved instead to say a Rio Tinto (NYSE: RIO), a company that is more diversified from a pure commodity basis than Alcoa is.

Now don’t get me wrong, just because I don’t believe Alcoa is worthy of the bellwether stature some insist on giving it, doesn’t mean I can’t think opportunities are abound for the company to seize upon. In fact, areas where I’m particularly interested to see the company’s progress are in recycling (downstream), automotive and next generation technology. 

By 2020, a whopping 50% of Alcoa’s products will be made from recycled aluminum. That is fascinating to me so hopefully Alcoa doesn’t drop the ball on continuing its current upside momentum in this area. I’d love to see Kleinfeld and his posse talk more about recycled aluminum being ten times more valuable than steel on a per ton basis (by the way, I was pleasantly surprised Kleinfeld had a different tone on the recent earnings call and basically called out Moody’s for putting their debt on downgrade watch).

As for the automotive opportunity in front of Alcoa, they should be doing whatever necessary (and legal of course) to bolster and create new relationships in the industry. The battle cry these days coming out of a Detroit is efficiency and that means light-weight vehicles could be all the rage in coming years, especially for electric cars that need to lower the weight of the car due to heavy EV batteries that desperately could use some help in boosting range to appeal to more consumers (lower weight cars would accomplish this). Speaking of electric vehicles, Alcoa has never formally said it has a relationship with Tesla (NASDAQ: TSLA) but something that jumped out at me in June was Alcoa going out of its way to issue a press release saluting Tesla on the launch of the launch of the all-aluminum Model S sedan (the 2012 Motor Trend Car of the Year for those living under a rock—not that there’s anything wrong with living under a rock mind you). So just why did Alcoa get so giddy on the Tesla S? Things to make you go hmmm.

Moving to next generation technologies, have you seen all the cool gadgets at the Computer Electronics Show (CES) in Vegas? Well, if you haven’t, here is a link provided by CNET for some products we may find under the Christmas Tree in upcoming years. The reason I even mention this is there is growing enthusiasm around using the material graphene as a way to develop products like tablets, TV’s and cellphones that are super thin and in some cases, bendable. Therefore, Alcoa needs to not be left in the cold and off the graphene bandwagon. In fact, I’d like to see them use some of the $1.9bln in cash to acquire some patents or even some small graphene players so they can market next generation materials to airline and auto customers. Yes, Alcoa has been using cash to pay down debt and I applaud them for that but the company can’t simply rely on ways of old to move into tomorrow’s markets (that’s another reason I don’t think they are a bellwether by the way). Rather, they need to embrace change and explore how graphene could be used as an extension of some of the company’s existing alumina products. Does this sound so far-fetched? I don’t think so considering back in 2009, the company signed a memorandum of understanding with the Russian Corp of Nanotechnologies to explore the role of next gen aluminum in future markets (i.e. offshore drilling, energy efficient buildings, transport, etc.). The company also forged an alliance with the University of Michigan for a next-generation solar vehicle which needed a lower weight aluminum body. My point is if graphene is lightweight (nearly paper thin), stronger than steel (maybe 100-200 times stronger) and can be bendable, then Alcoa needs to get involved in the space or it may have to rely much more on recycling aluminum in the future to generate revenues.

2013 is the Chinese Year of the Snake. This means change is coming and Alcoa should pay attention. Enough of the restructuring! Let’s see execution. If the company can show it can become a true leader (notice I did not say bellwether) in adopting to future markets, the Year of the Snake could make Alcoa a surprise winner to add to the portfolio. If the company won’t embrace change, the Year of the Snake may turn venomous and simply just bite investors like it has since 2008 and that’s not a good thing.

 

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