Alcoa-A Coincidence?-We Think Not!
Firms that contribute in-kind assets to their pension plans are raising a warning flag.
Firms whose plans are still underfunded (according to our analysis), even after a large ($600MM in-kind) contribution, are raising a big warning flag-even if they deny the underfunded status (some surprising companies on our list).
Firms which report positive cash flow from operations ( from which free cash flow is computed) resulting from working capital changes combined with other cutbacks, are raising a flag. And if their free cash flows have been negative for several years, after making such adjustments (as with AA), they are raising a huge warnings flag.
Firms which will overstate next quarter’s earnings and cash flow from operations as the pension contribution will be less than really needed, are raising a flag.
Firms which have a higher than average cost of capital are raising a very big flag.
And the above flags apply to Alcoa.
If there is one metric investors do not now need (unless shorting), it is firms with high risk profiles, whether it be due to sales or tax volatility, high cash burn rates, excessive leverage in relation to cash flows, questionable actuarial assumptions related to its pension plan, or a combination of other factors we discuss on these pages.
We will continue to identify such firms in our analysis. If you are interested in performing such analysis yourself, especially cash flow and cost of capital, please pre-order “Security Valuation and Risk Analysis“.
Related articles: Alcoa (AA) -Initial Impression, CNBC Feature – Alcoa’s (AA) Earnings Not As Rosy As It Seems?
Kenneth S. Hackel, C.F.A.
President
CT Capital LLC
