Cheaper and Better than the Leader

Written by GSCR Staff   
Wednesday, 09 January 2013 11:06

Yesterday, Dow Jones component Alcoa (NYSE – AA - $9.10) kicked off earnings season with upbeat news and a positive yet slightly cautious outlook.  AA sees continued demand increase for its aluminum products in 2013, primarily from the aerospace and construction industry.  The Company posted a profit for 2012, meeting Street estimates.

Still, the following questions remain:

Will aluminum and related composites rebound in 2013 after a tough 2012?

What is the best play on this?

Aluminum prices have increased slightly on the London Metals Exchange over the last few months helping the revenue story for companies in the space.  Analysts forecast a worldwide increase in demand in 2013 with the industries mentioned above and a rebound in emerging markets like China.  The one risk sitting out there is the U.S. defense industry and what kind of cuts, if any, will occur in spending that could impact the aluminum products market.

One firm that has exposure in all the right places is Noranda Aluminum Holding Corporation (NYSE – NOR - $6.66), a producer of aluminum products and rolled aluminum coils primarily in the US.  The Company was founded in 2007 in Franklin, TN, and has a customer base that uses its products in building construction, architectural, transportation, electrical, and steel de-oxidation applications. Its rolled products are used in foil products, packaging applications, transformer windings, and light gauge converter foils to name a few examples.

The stock has been trudging in the $5-$7 range since last summer after dropping steadily from the $12 range about a year ago.   Technically, it appears as if the stock may have reached an inflection point of $5.56 in mid-November and has made a nice comeback, closing at $6.66, yesterday.

We like this play based on the increased demand forecast for the overall industry, its current valuation, and technical chart.  Street EPS estimates for 2012 are $0.12 and $0.62 in 2013, illustrating a return to significant profitability.  The Company is set to announce 4Q12 and overall 2012 results on February 20th.

Even if the industry slugs along and does not return to form, NOR remains cheap, relative to the industry’s bellwether. Alcoa is trading at a 13.5x multiple on FY13 EPS and clearly NOR should 13-15x FY13 EPS as well, compared with its current 10.3x FY13 EPS P/E.  As a result, we expect NOR to reach the $8.00-9.00 range following its upcoming financials release.

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

Disclaimer:

This Market Monitor blog was prepared for informational purposes only. Goldman Small Cap Research, (a division of Two Triangle Consulting Group, LLC) produces research via two formats: Goldman Select Research, which typically highlights small cap companies, and Goldman Opportunity Research, which features micro cap companies in a sponsored research format. Thus, the Select product reflects the Firm’s internally generated stock ideas while the Opportunity product reflects sponsored research reports.

It is important to note that while we may track performance separately, we utilize the same coverage criteria in determining coverage of all stocks in both research formats. Please view the company’s individual disclosures for each engagement, which can be found in each company-specific report. All information contained in this blog, newsletter and in our reports were provided by the Companies or generated from our own due diligence. Our analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests, retain editorial control, and ensure independence. Analysts are compensated on a per report basis and not on the basis of his/her recommendations.

The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Goldman Small Cap Research did not make an independent investigation or inquiry as to the accuracy of any information provided by the Company, or other firms. Goldman Small Cap Research relied solely upon information provided by the Company through its filings, press releases, presentations, and through its own internal due diligence for accuracy and completeness. Such information and the opinions expressed are subject to change without notice. A Goldman Small Cap Research blog, report, note, or newsletter is not intended as an offering, recommendation, or a solicitation of an offer to buy or sell the securities mentioned or discussed.

This blog does not take into account the investment objectives, financial situation, or particular needs of any particular person. This blog does not provide all information material to an investor’s decision about whether or not to make any investment. Any discussion of risks in this presentation is not a disclosure of all risks or a complete discussion of the risks mentioned. Neither Goldman Small Cap Research, nor its parent, is registered as a securities broker-dealer or an investment adviser with FINRA or with any state securities regulatory authority.

ALL INFORMATION IN THIS BLOG, REPORT OR NEWSLETTER IS PROVIDED “AS IS” WITHOUT WARRANTIES, EXPRESSED OR IMPLIED, OR REPRESENTATIONS OF ANY KIND. TO THE FULLEST EXTENT PERMISSIBLE UNDER APPLICABLE LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE FOR THE QUALITY, ACCURACY, COMPLETENESS, RELIABILITY OR TIMELINESS OF THIS   INFORMATION, OR FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES THAT MAY ARISE OUT OF THE USE OF THIS INFORMATION BY YOU OR ANYONE ELSE (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF OPPORTUNITIES, TRADING LOSSES, AND DAMAGES THAT MAY RESULT FROM ANY INACCURACY OR INCOMPLETENESS OF THIS INFORMATION). TO THE FULLEST EXTENT PERMITTED BY LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE TO YOU OR ANYONE ELSE UNDER ANY TORT, CONTRACT, NEGLIGENCE, STRICT LIABILITY, PRODUCTS LIABILITY, OR OTHER THEORY WITH RESPECT TO THIS PRESENTATION OF INFORMATION.

For more information, visit our Disclaimer: www.goldmanresearch.com

Add comment
  • No comments found