Alcoa (AA) -Initial Impression
Alcoa (AA) worked its assets to eke out some free cash flow during the quarter, as it has the past three years.
However, management’s statement that free cash flow would have been even higher had it not been for the ending of several accounts receivable programs doesn’t hold a lot of water.
Over the past three years, after adjusting for “working the balance sheet”, AA produced on average $1.2 billion in cash flow from operations, or 38% below that reported to stockholders under cash flow from operations. Thus, while AA still has some additional “capture” here, the bulk of the work is done. We are, however, impressed with AA’s fixation on free cash flow, although I point out this is not unusual for debt heavy firms which have been reporting tax losses, like Alcoa. For example, during FY ’09, AA’s cash tax rate was negative, while its effective rate was 38.7%
AA still has an underfunded pension, which surprisingly did not come up during analyst questioning, despite the $600MM stock contribution the company made in its first fiscal quarter. AA still has steep debt payments over the coming few years.
AA appears to be a risky stock I would avoid, although a better than a dreadful scenario, and general equity market rally will likely result in some advance in its shares.
Disclosure: No positions.
Kenneth S. Hackel, C.F.A.
President
CT Cpital LLC
