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 Stocks for Using A Benjamin Graham Value Investing Strategy – March 2017. 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 Corp (AA) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Alcoa Corporation, formerly Alcoa Upstream Corporation, is engaged in the production of bauxite, alumina and aluminum of various cast and rolled products. The Company is engaged in the production and management of aluminum and alumina combined through its participation in various aspects of the industry, such as technology, mining, refining, smelting, and recycling. The Company’s segments include Bauxite, Alumina, Aluminum, Cast Products, Energy and Rolled Products. The Company’s Bauxite segment represents its global portfolio of bauxite mining assets. The Company’s Alumina segment represents its refining system across the world, and processes bauxite into alumina and sells it directly to internal and external smelter customers across the world. The Company’s Aluminum segment represents its smelter system across the world. Its Energy segment represents its portfolio of energy assets, with power production capacity of approximately 1,685 megawatts.
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Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$6,855,587,425||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||1.37||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Fail|
|4. Dividend Record||Dividend Payments for 10 years prior||Fail|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||-90333433.33%||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||-118.69||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||1.16||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||1.37||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||1.45||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Fail|
|4. Dividend Record||Currently Pays Dividend||Fail|
|5. Earnings Growth||EPSmg greater than 5 years ago||Fail|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||-4.25%|
|MG Value based on 3% Growth||-$4.54|
|MG Value based on 0% Growth||-$2.66|
|Market Implied Growth Rate||-63.60%|
|% of Intrinsic Value||N/A|
Alcoa Corp 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 poor dividend history, 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, and the lack of dividends. 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 in 2013 to an estimated $-0.31 for 2017. This level of negative earnings does not support a positive valuation.As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Alcoa Corp revealed the company was trading below its Graham Number of $54.11. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was -118.69, which was below the industry average of 146.28, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-39.74.
Alcoa Corp receives an average overall rating in the ModernGraham grading system, scoring a C-.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$39.74|
|Number of Consecutive Years of Dividend Growth||0|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||6/1/2017|
|Total Current Assets||$3,583,000,000|
|Total Current Liabilities||$2,608,000,000|
|Shares Outstanding (Diluted Average)||186,000,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$4.21|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||-$0.31|
Other ModernGraham posts about the company
|Alcoa Inc Valuation – July 2016 $AA|
|58 Companies in the Spotlight This Week – 1/31/15|
|Alcoa Inc. Annual Valuation – 2015 $AA|
|14 Companies in the Spotlight This Week – 1/4/14|
|ModernGraham Valuation: Alcoa Inc. (AA)|
Other ModernGraham posts about related companies
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.