In Focus

Aluminum Reigns High in a City Known for Steel

NOTE: June was a month for buying. So for the whole month, we will be going into detail on the companies that we recently considered for our quarterly Chick "buy." We ended up purchasing stock in Medtronic (MDT) on June 3, 2001, but there were many, many great companies that didn't get our majority vote. We wanted to highlight them as it was a close call and they are still up for consideration for our next buy in September. For more on the companies that were considered, and what we'll be featuring all month, check out our summary.

I have the weakest track record when it comes to researching a stock in which other Chicks might be interested. I've chosen companies whose business intrigue me mainly because of the products produced. One case in point was the company I suggested we purchase at our June buy month meeting, Pittsburgh-headquartered Alcoa, Inc. (NYSE: AA).

Nearly six months ago, a coworker and I traveled to the jumpin' and jivin' city of Port La Vaca, Texas. Yep, that's right all of you Spanish-speaking readers, that's Cow Port in Spanish. Let's just say that aside from the Taco Bell, Subway and Wal-Mart, not much was shakin' in good ol' Cow Port. However, on my second day there, I toured Alcoa's plant. It's located right on the Gulf Coast where its port is the drop point for bauxite, the main ore mineral responsible for the production of alumina, from its Jamaican plant, Jamalco. In addition to learning how aluminum is made and encased, I had the pleasure of  working with Alcoa's worldwide employees from Suriname, Brazil to right here in Steelmaker town, USA -- Pittsburgh.  I was impressed by Alcoa's palpable vision and global impact, not to mention that we, the Chicks, did not own any Metal Mining or natural resource companies in our portfolio. I thought, "Well, here's a company that will diversify our portfolio. The Chicks will love this stuff." NOT! Let me share with you why Alcoa was foiled.

The first four Chicks' Dozen criteria were easy to meet. I know aluminum. I drink soda and I use loads of tin (I mean, aluminum) foil. Do any of you use these products: Reynolds Wrap Aluminum Foil, Reynolds Plastic Wrap, Reynolds Oven Bags, Reynolds Pot Lux Cookware, Reynolds Freezer Paper, Reynolds Cut-Rite Wax Paper, Reynolds Baker's Choice Bake Cups and Reynolds Wrappers Foil Sheets? If so, welcome to Alcoa's world. That's right, they own Reynolds. Those automobiles and trains we use - Alcoa's materials frame and support. Those structures we live and work in - buildings - Alcoa's siding shields. Even the Empire State Building's architect knew a good thing when he chose Alcoa's aluminum for his 1931 design.

Our Industry and Repeat Profitability criteria are no problem for Alcoa. Aluminum, the most abundant metallic element, is light in weight, nontoxic, highly resilient to corrosion, nonmagnetic and extremely recyclable, which conserves energy the second time around as it's made from scrap. Given that and Alcoa's ability to diversify its product usability, longevity for this metal mining manufacturer is its destiny. And I almost forgot to mention that Alcoa is the world's leading producer of primary aluminum, fabricated aluminum and alumina. Active in all major aspects of the industry -- technology, mining, refining, smelting, fabricating and recycling -- Alcoa has operations in 37 countries. That should satisfy the Leader in its Field criterion.

Looks good, right? Stick with me, and I'll take you through the numbers that sunk its chances. Alcoa's first quarter numbers were less than Chicky. As of March 31, 2001, Alcoa's Gross Margin was 23.69%. Its Net Margin was 6.54%. Alcoa had 10 times more long-term debt than cash, and its all-indicative flow ratio equaled 1.42, which fell far below our preferred 1.25 goal. I knew I was defeated the minute I posted those numbers onto the Chicks Laying Nest Eggs Message Board. (Read post.)

However, I did find one saving grace, Alain J. Belda, Alcoa's Chief Executive Officer (CEO). Forbes.com ranked Belda the number one CEO in the Metals Industry. He ranked 73^rd overall, beating out other CEOs of companies in which the Chicks own stock. Alain Belda has led the way for Alcoa to acquire Dooray Air Metal, a Korean facility that produces aluminum wheels and castings for automotive, aerospace, and defense applications in the Korean domestic and export markets. In April this year, Belda presented Alcoa's 2020 Global Environmental Strategy. President Bush, are you reading this? You might learn a thing or two from Mr. Belda. These are the goals:

• A 60% reduction of nitrogen and mercury emissions by 2010;
• A 25% reduction in greenhouse gas emissions by 2010;
• Increased emphasis on product design for the environment and on product recycling or reuse;
• A 50% reduction in landfilled waste by 2007.

If that's not enough, Belda knows a good thing when he invests in it. This "it" happens to be MetalSpectrum, an online metals marketplace that creates value and increases efficiency across the supply chain for end-users, distributors and manufacturers of aluminum, stainless steel, carbon steel, copper, brass and other specialty metals. According to a PricewaterhouseCoopers' study, Alcoa can expect to decrease its contract sourcing business costs by 3 - 5 % (source: www.alcoa.com). Looks to me as if Alcoa is in good hands with Belda, and so are its shareholders, customers and employees for years to come.