Personal Finance

Why You Should (and Shouldn't) Buy Alcoa Inc.

Molten aluminum being poured

Despite reporting a big loss in fourth-quarter earnings last month, Alcoa (NYSE: AA) continues to shine as investors look to its adjusted earnings for indications on what the bauxite, alumina, and aluminum producer can yet accomplish.

Below, we invite two Motley Fool contributors to share why they believe Alcoa is a buy in this market, or if it's still too early to know which way its business can turn.

Molten aluminum being poured

Image source: Getty Images.

Still at whim of pricing, needs to prove its mettle

JasonHall : There's a case to be made that Alcoa's stock is cheap today. Based on the company's most recent earnings, Alcoa's assets are worth $42.13 per share. That means Alcoa shares are trading at a 12% discount to the net value of the company's assets.

But before you click over to your online broker age to buy, consider this: Alcoa's book value fell in the quarter, from over $49 per share at the end of the third quarter. This is because Alcoa is still in the process of "rightsizing" its business operations, and the closure of facilities reduced the carrying value of its assets. Alcoa also took an impairment to the value of one of its natural gas assets.

There's a chance the company could take more actions like this, writing down assets and taking impairments as market conditions change -- and as management works through its operations and potentially closes more facilities.

However, that's only part of the risk. The company's share price has accelerated swiftly since the election of Donald Trump as president of the U.S., largely on expectations for increased infrastructure spending, which would be good for Alcoa, as well as the idea that Trump's "America first" platform would be a boon for American manufacturers.

The problem is, that may not be as good for Alcoa as it sounds. Alcoa relies on foreign sources (especially Australia) for nearly all of its raw materials, and it sells products in dozens of countries around the world. For this reason, an overly aggressive trade policy by the Trump administration could backfire and end up harming Alcoa's prospects.

Despite the notable improvements Alcoa has made on its cost structure that have helped it become a more low-cost producer, the company's prospects are still largely tied to raw materials prices. Aluminum prices have moved up some in the past few months, but they're still near some of the lowest in years. If this continues, Alcoa may struggle to generate the profits Mr. Market is counting on. And that could lead to losses for investors.

Bottom line: I see the potential value, but I don't think Alcoa is finished tinkering with its assets and operations just yet, and that makes it hard to value the company. With only a couple of quarters as a stand-alone business under its belt, it's still not clear how profitable (if at all) Alcoa is set to be.

Until those things become more clear, I'm staying on the sidelines.

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Jason Hall has no position in any stocks mentioned. Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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