For this valuation, a Discounted Cash Flow model is used. There is no simple way to value Alcoa so three views will be taken. One that assumes zero free cash flow for many many years. The second will use the 10 year average for Free cash flow as a basis for future free cash flows. And a third view will be an optimistic view that assumes that management can better control capital expenditures going forward.
Both approaches require a share count. As of the latest 10-Q, there are 974 million shares outstanding (974,377,851 to be exact). However, there are convertible notes which could dilute the current share base. There is the potential for 89 million additional shares through these convertible notes. So for valuation purposes, assume 1.063 billion shares.
- valuation 1
The simple approach is to use the $13.2 billion in shareholder equity that is on the books. This will serve as the minimum valuation of Alcoa. This is about $12.42 per share. This valuation is simply a discounted cash flow analysis that assumes that no free cash flow for all future years.
- valuation 2
So long as management is steadfast in their actions for the long term, shareholders could very well be rewarded. This in large part means that management needs to continue to tightly control capital expenditures going forward just as they have during the current recession. Without tight controls on cap ex going forward, this valuation may be overly-optimistic. Having said this, the average free cash flow for the past 10 years is $364 million. This will serve as free cash flow for year one in this valuation. A low free cash flow growth rate of 4% is used with a discount rate of 9%. These future free cash flows discounted to current value (at a rate of 9%) yield value of about $4.4 billion. Or $4.14 per share. Add this to the $12.42 previously calculated and an intrinsic value of $16.56
- valuation 3
This is the valuation which shows the true potential for Alcoa. This assumes free cash flow of $1 billion for FY2010. It will then grow at 6$ for 10 years and 4% for the 10 after that. A discount rate of 9% is used again. By doing this, a value of $26.9 billion is calculated. This is $25.32 per share.
- valuation conclusion
Alcoa closed at $13.40 on Friday. At a bare minimum, Alcoa is worth $12.42 per share. More realistically, Alcoa is probably worth at least $16.50. And the optimistic view is that Alcoa is worth 25.32. There seems t be only upside potential here. http://www.gurufocus.com/news.php?id=82479
The market is not even remotely logical. Thats why this stock went down to $5 in March. The stock is controlled by hedge funds, the market maker, the media, and mutual funds. The underlying fundamentals have no say in the matter nor does the financial technicals. It would be easy to make money if stocks traded on fundamentals. Stocks go up and down based on fear, greed, and supply to demands mismatches also. The stock market is about to take a huge dive down. Alcoa will get pulled down with it. The only chance this stock has over this year is a buy out, which will never happen, because aluminum is dead money. The only reason aluminum went up is because of restocking, government stimulus, and low USD. Dont get sucked into this pile of crap like I have.
exactly right and well said. the only thing to add is that the dividends, or more precisely, the future dividends is what determines a stock price. Looking at that history and how the board has rewarded their own, not the common shareholder, it is time to say bye-bye to AA common stock. It is for losers.
If they don't pay a handsome dividend and do not have a good history, not interested. Check out the big oil company stocks like Chevron, Exxon, and BP. They all pay nice big dividends and always have. Why mess around with AA.