Guru Paul Singer (Trades, Portfolio) purchased a 67,100,000-share stake in Alcoa Inc. (AA, Financial) in the fourth quarter.
Alcoa was originally founded on Oct. 1, 1888, as the Pittsburgh Reduction Company. It was based on technology developed by Alcoa's co-founder, Charles Martin Hall.Ă‚ Alcoa is the global industry leader among companies that engineer and manufacture lightweight metals. Alcoa produces aluminum, titanium and nickel, which are used in aircraft, automobiles, commercial transportation, packaging, oil and gas, defense and industrial applications.
Alcoa produced the first aluminum kettle and introduced aluminum foil to the world as well as aluminum furniture, the first aluminum wheel on any modern passenger car and aluminum cans with pull tab rings that could be opened by hand instead of with a can opener.
Alcoa solutions have helped shape every major advance in aviation including the world's first flying machine. Alcoa’s aluminum was used by the Wright brothers to build and create the engine block and the crankcase of their flying machine to reduce the weight of the aircraft, improving the chances of a successful flight. This helped enable the Wright brothers to take off on Dec. 17, 1903 at Kitty Hawk, North Carolina, flying 20 feet above the ground. The flight lasted 12 seconds and covered a distance of 120 feet soaring through the air.
Today, Alcoa is known as the most admired metals company in the world, according to Fortune magazine. Alcoa also receives top ranking for sustainability and innovation. Alcoa has been on Fortune’s Most Admired list for 29 consecutive years.
Alcoa has a market cap of $12.32 billion, an enterprise value of $21.61 billion, a P/B ratio of 1.09 and a dividend yield of 1.25.
In the third quarter of 2015, Alcoa announced that the company was going to split into two separate businesses. The first company is the raw metals business, which has taken a beating due to falling aluminum prices. That was partially due to a decline in China's economic growth which has led China to an excessive amount of metals that has devalued the price of aluminum and affected Alcoa's business.
The second company is called the value add company. Alcoa intends the value add company to be a premiere innovator of high-performance multimaterial products and solutions, positioned to grow in growth markets. The value add company will focus on global rolled products, engineered products and solutions and transportation and construction solutions.
Aside from the company splitting operations into two businesses, there are a few noteworthy risk factors for Alcoa that I found in the company's most recent 10-K filing.
- The aluminum industry and aluminum end-use markets are highly cyclical and are influenced by a number of factors, including global economic conditions.
- Alcoa could be adversely affected by declines in aluminum prices, including global, regional and product-specific prices.
- Alcoa’s operations consume substantial amounts of energy; profitability may decline if energy costs rise or if energy supplies are interrupted.
- Interest expense –Â Interest expense was $498 in 2015 compared with $473 in 2014. The increase of $25, or 5%, was primarily due to an 8% higher average debt level, somewhat offset by the absence of fees paid associated with the execution and termination of a 364-day senior unsecured bridge term loan facility related to the then-planned acquisition of Firth Rixson. The higher average debt level was mostly attributable to higher outstanding long-term debt due to the September 2014 issuance of $1,250 in 5.125% notes, the proceeds of which were used to pay a portion of the purchase price of the Firth Rixson acquisition.
Singer graduated with a B.S. in psychology from the University of Rochester in 1966 and a J.D. from Harvard Law School in 1969. In 1979, Singer founded the hedge fund Elliott Management in January 1977 after raising $1.3 million in capital from his friends and family. The name Elliott used in the title came from Singer's middle name which is Elliott.
Elliott Management currently owns 73 stocks with a total value of $8.18 billion.
Guru Steven Romick, who manages the award-winning FPA Crecent Fund, which owns 41,447,242 shares of Alcoa, had these comments about the company in early February:
"Weak aluminum prices and inventory adjustments in the aerospace supply chain negatively impacted Alcoa’s profitability and its stock price in 2015. We support the company’s decision to separate its highly engineered, value-added aerospace business from its commodity aluminum operations. As the price has declined in the last year, we have doubled the number of shares we own and are hopeful that the pending spinoff will create clarity and value for the enterprise."
Below is a Peter Lynch chart for Alcoa
Alcoa is a company that has been dealing with some tough times due to declining aluminum prices, which is a large part of its business. If aluminum prices get back to where they were in 2008, the company's share price could potentially skyrocket and Singer could look like a true genius for his purchase.
Cheers to your investment success.
