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.

###

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