2012 Preview: Alcoa

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With 2011 finally in the books, it's time to reflect on what transpired and what companies could be facing business-altering decisions in 2012. On today's plate we have the world's largest producer of aluminum, Alcoa (NYS: AA) .

Before we dig too deeply into what 2012 may have to offer, let's get a quick snapshot at how 2011 treated shareholders:

Stock Return(43.3%)
Price-to-Earnings (TTM)9.6
Price-to-Sales (TTM)0.4
Cash/Debt$1.34 billion / $9.31 billion
Projected 5-Year Growth Rate23.7%
Forward P/E11.2

Source: Yahoo! Finance. TTM = trailing 12-months.

If you were an Alcoa shareholder in 2011, I'd have probably written you a prescription entitling you to bury your head in the sand until 2012. Aluminum prices were depressed and worldwide demand was weak, which led to Alcoa turning in a gruesome 43.3% yearly loss. All in all, 2011 was a year to forget for shareholders. But these results are in the past. Let's look ahead and see what could be driving Alcoa's stock price in 2012.

What to expect
2011's results may be in the past, but unfortunately Alcoa has much of the same to look forward to in 2012. Depressed aluminum prices are making it absolutely impossible for it and its closest peers to turn a meaningful profit. In the past six months, aluminum prices have dropped from $1.10 per pound to just $0.90 per pound. These are the lowest prices aluminum producers have dealt with in 16 months and a mixture of oversupply and weak demand simply isn't helping their cause.

Alcoa has only one choice it needs to make in 2012: to cut costs no matter what. As unpopular as layoffs and work stoppages can be, Alcoa isn't really left with much of a choice as it attempts to reduce supply and hopefully lift struggling aluminum prices. It took the first step Thursday night by announcing a 12% reduction in its smelting capacity, or 531,000 metric tons, which should help curtail costs and boost prices. Still, this move has other repercussions.

First, it reaffirms the notion that China's growth is indeed slowing. China's PMI, a measure of manufacturing growth whereby any number above 50 signals expansion, came in at 52.5 this week. This did mark the 74th consecutive month of expansion, but at 52.5 it also shows just how sluggishly the manufacturing sector is now growing in part because of monetary tightening measures.

Second, it points to a possible inventory glut of aluminum in the U.S. and Europe. I don't see much for Alcoa to be bullish about in Europe with a myriad of austerity packages set to go into full effect in 2012. As for the United States, January's PMI data showed a 5% rise in imports, so that could wind up being good news for Alcoa, but it alone is not going to be enough to get the company back on track.
Luckily for Alcoa, misery loves company. Even though Chinalco (NYS: ACH) expects to remain profitable for fiscal 2011, Europe's woes and lower aluminum prices are casting doubt on its turning a profit in 2012. Likewise, Century Aluminum (NAS: CENX) has seen its 2012 EPS estimates reduced by more than 50% in less than three months as it is no longer profitable to produce with aluminum at such low prices.

Foolish roundup
It could be an ugly year for the entire sector, most of all Alcoa, which doesn't have any auxiliary metals to rely on to buffer its results. (Chinalco holds copper interests that have aided its results). As much as I would like to believe in the Alcoa turnaround story in 2012, it may be another year before the stock really finds its footing. I will maintain my outperform rating on Alcoa on CAPS, but clearly my vision is for the long term.

While Alcoa may need until 2013 to turn it around, we've found a company that's poised for explosive growth in the year ahead. Check out our detailed free report, "The Motley Fool's Top Stock for 2012," in which a top-notch team of analysts highlights a company dubbed the "Costco of Latin America." The best part is the report is completely free!

At the time this article was published Fool contributorSean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat'll never crumble on you like an aluminum can.

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