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SIVY ON STOCKS from money.com
May 9, 2001 Aluminum shines The economy should come back later this year, and classic cyclical stocks, such as Alcoa, have already begun major upswings. By Michael Sivy Amid all the concern about technology stocks, many investors seem to have forgotten that the traditional business cycle still exists. But while the drop -- and the more recent recovery -- in tech has been the most dramatic event in the stock market, companies in other sectors have felt the results of the economic slowdown, too. In fact, many traditional cyclical companies experienced a classic bear market that ended a few months ago -- and they now appear to be in the first phase of a recovery that could last as long as five years. The biggest gains figure to be in industries that benefit both from improving economic activity and from moderate increases in inflation. Chief among these stocks are the producers of raw materials. Since the supply of commodities can't change very quickly, prices are set largely by the level of demand. As a result, an economic upturn can make commodities prices firm up quite suddenly. Moreover, initial inflation pressures -- such as those that have been reported in the past couple of months -- typically show up in the prices of metals before they show up in manufactured goods and services. Alcoa [AA] is a prime example of such a stock. The world's largest aluminum producer, Alcoa's earnings hardly fell during the slowdown of the past nine months. Growth is expected to revive and accelerate over the rest of 2001. And next year, the company is projected to increase earnings more than 30 percent. Alcoa's resilience has several sources. One has been aggressive cost reduction. Alcoa has already trimmed annual costs by $1 billion and plans to cut $1 billion more. In addition, the aluminum giant has been shedding non-core assets, such as an alumina refinery in Australia and the Thiokol propulsion business that it acquired through an acquisition. Over the next couple of years, Alcoa should become a more focused and more profitable company. Despite all this good news, Alcoa's results have been held back by three factors -- the general economic slowdown, the somewhat depressed aerospace market and the West Coast electricity shortage, which has idled some production capacity. All three, however, are about to improve. The economy should be in a solid recovery by next year. The construction of commercial aircraft should reach a peak in the next few years, thanks to new models from both Airbus and Boeing. And power availability in the Pacific Northwest will eventually recover as well. The result will be an extraordinarily strong upswing in earnings that will rival those of some tech stocks. Over the next five years, Alcoa's earnings should increase faster than 15 percent annually. At $41.50, Alcoa is trading at just about 20 times estimated earnings for the current year and less than 16 times next year's projected results. That compares with an average P/E of 18 over the past six years. For anyone looking to balance a tech portfolio without sacrificing above-average growth, Alcoa is a perfect choice. ### Post your comments on Michael's column at: http://www.money.com/depts/investing/sivy/index.html To subscribe or unsubscribe to Sivy on Stocks, go to: http://www.money.com/email/ ----------------------------------------------------------- MARKETPLACE ----------------------------------------------------------- CONTACT THE BIGGEST COMPANIES IN THE WORLD! Over 5,000 contact names in the OFFICIAL FORTUNE Databases. DOWNLOAD THEM NOW! http://www.fortune.com/datastore/?mn1 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Special Internet Offer!!! Sign up for a RISK-FREE issue of MONEY MAGAZINE at http://www.money.com/subscribe2 Or if you prefer call our toll-free number 1-800-544-4594 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * We may, from time to time, contact you with offers for Time Inc. products and services which we think may be of interest to you. If you would prefer us not to contact you in this manner, AND YOU DID NOT INDICATE THIS PREFERENCE AT THE TIME YOU SIGNED UP for the Sivy on Stocks online newsletter or any other Time Inc. online newsletters, please let us know by sending us an e-mail at <no_solicit@money.com<. Additionally, from time to time we may provide your e-mail address to carefully chosen companies whose offers we think may be of interest to you. If you would prefer us not use your e-mail address in this manner, AND YOU DID NOT INDICATE THIS PREFERENCE AT THE TIME YOU SIGNED UP for the Sivy on Stocks online newsletter or any other Time Inc. online newsletter, please let us know by e-mailing us at <no_transfer@money.com<.
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