Alcoa Inc Valuation – July 2016 $AA

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today - June 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Alcoa Inc (AA) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Alcoa Inc. is engaged in lightweight metals engineering and manufacturing. The Company operates in five segments: Alumina, Primary Metals, Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions. The Company’s multi-material products, which include aluminum, titanium and nickel, are used across the world in aerospace, automobiles, commercial transportation, packaging, building and construction, defense, consumer electronics, oil and gas, and industrial applications. It is also engaged in the production and management of primary aluminum, fabricated aluminum, and alumina combined, through its participation in various aspects of the industry, including technology, mining, refining, smelting, fabricating and recycling. It has operations in approximately 30 countries. The Company has investments and operating activities in Australia, Brazil, China, Guinea, Iceland and Saudi Arabia, among others. It also refines alumina from bauxite ore.


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Downloadable PDF version of this valuation:

ModernGraham Valuation of AA – July 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $14,642,945,197 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.47 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -92.52% Fail
6. Moderate PEmg Ratio PEmg < 20 -45.50 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.20 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.47 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 3.18 Fail
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail

Stage 2: Determination of Intrinsic Value

AA value chart July 2016

EPSmg -$0.24
MG Growth Estimate -4.25%
MG Value $0.00
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth -$3.48
MG Value based on 0% Growth -$2.04
Market Implied Growth Rate -27.00%
Current Price $10.92
% of Intrinsic Value N/A

Alcoa Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability or growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $0.08 in 2012 to an estimated $-0.24 for 2016. This level of negative earnings does not support a positive valuation.As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

Alcoa Inc scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Stage 3: Information for Further Research

AA charts July 2016

Net Current Asset Value (NCAV) -$11.58
Graham Number $6.83
PEmg -45.50
Current Ratio 1.47
PB Ratio 1.20
Current Dividend $0.12
Dividend Yield 1.10%
Number of Consecutive Years of Dividend Growth 0


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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2016
Total Current Assets $8,093,000,000
Total Current Liabilities $5,488,000,000
Long-Term Debt $8,278,000,000
Total Assets $36,139,000,000
Intangible Assets $5,396,000,000
Total Liabilities $23,804,000,000
Shares Outstanding (Diluted Average) 1,356,159,000

Earnings Per Share History

Next Fiscal Year Estimate $0.22
Dec2015 -$0.31
Dec2014 $0.21
Dec2013 -$2.14
Dec2012 $0.18
Dec2011 $0.55
Dec2010 $0.24
Dec2009 -$1.23
Dec2008 -$0.09
Dec2007 $2.95
Dec2006 $2.57
Dec2005 $1.40
Dec2004 $1.49
Dec2003 $1.08
Dec2002 $0.49
Dec2001 $1.05
Dec2000 $1.80
Dec1999 $1.41
Dec1998 $1.21
Dec1997 $1.16
Dec1996 $0.74

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate -$0.24
Dec2015 -$0.41
Dec2014 -$0.38
Dec2013 -$0.61
Dec2012 $0.08
Dec2011 $0.19
Dec2010 $0.30
Dec2009 $0.59
Dec2008 $1.56
Dec2007 $2.22
Dec2006 $1.70
Dec2005 $1.22
Dec2004 $1.14
Dec2003 $1.03
Dec2002 $1.07
Dec2001 $1.35
Dec2000 $1.42

Recommended Reading:

Other ModernGraham posts about the company

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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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