Despite rough times, Alcoa positions itself for prosperity

It’s hard to find a mining and metals company that has experienced a tougher two years than Alcoa (NYSE: AA). With economic factors pushing and tugging at it, including a 60 percent drop in aluminum prices, the company’s shares have tumbled from the $30s to the around $10. That should draw investor attention to the venerable Pittsburgh company.

It hasn’t been sitting still, recently announcing the acquisition of privately held Traco, which manufactures premier windows and doors for sale globally. At the same time, it’s spending $1.5 billion on the construction of a low-cost bauxite mine in the Amazon jungle. Bauxite is critical to aluminum manufacturing, and Alcoa aims to compete more with lower-cost and smaller rivals.

Alcoa has furloughed 60,000 employees and shaved $3 billion in operating costs. It’s spending $2.2 billion to partner with Saudi Arabian interests in a new aluminum mining project. Alcoa has also spent about $750 million in Russia during the past few years, modernizing plants to better serve the country’s food, beverage and aerospace industries.

But perhaps the biggest long-term benefit to the company will be China’s recent decision to permit its yuan to rise freely against the dollar. That step could increase aluminum demand in China.

Ask the Fool

Q: Can you explain what “goodwill” is? – R.S., Greenwood, S.C.

A: You’ll typically find “goodwill” on a company’s balance sheet if it has acquired another company and paid more than the acquiree’s appraised net worth (approximately its book value).

Imagine that Tattoo Advertising (ticker: YOWCH) acquires Glitter Factory (ticker: SPRKL). If Glitter is considered a gem and other companies would love to acquire it, Tattoo Advertising probably can’t get away with paying just what the company is worth. Offering merely that might trigger counterbids, so it pays a premium, which appears on the acquirer’s balance sheet as “goodwill.”

Consider that Tattoo’s book value was $100 million before the acquisition. Glitter was calculated to be worth $20 million, but Tattoo offered $25 million in cash. Tattoo’s value won’t change. It will still be worth $100 million, but it wouldn’t have as an asset on its balance sheet that $25 million in cash that it paid. That sum would be replaced by the $20 million value of Glitter as well as a $5 million value designated as goodwill.

Just as capital assets such as factory equipment depreciate over time, with their value decreased eventually to zero, goodwill is also incrementally reduced to zero.

Q: What’s a trust? – P.W., Nevada, Mo.

A: It’s a legal tool, where someone (a “trustor”) gives control of property to a person or an institution (the “trustee”). This is done for the benefit of someone else (the “beneficiary”). The beneficiary owns the property, but the trustee controls it – usually for a limited period (perhaps until the beneficiary reaches a certain age). Trusts are often a part of estate plans. You can learn more from a financial adviser. (You might seek one out at www.napfa.org.)

My dumbest move was buying shares of Movie Gallery around $9 per share, watching it go past $50, and then getting greedy and not selling. I stopped watching it for a while, and the next thing I knew, it was out of business. I learned two things: to watch my stocks more often (I use price alerts), and to place stop-loss orders. Luckily, I didn’t lose too much, as my portfolio is diversified enough. – A.X., online

The Fool responds: Greed messes up a lot of investors. It’s human to want to make just a little more before selling, but if you know that a stock is too risky, or that its price has gotten way ahead of itself, be smart and sell.

It’s important to keep up with your holdings, and having your brokerage or an online service send you alerts about big price moves or news regarding your companies can be helpful. Many investors also place stop-loss orders with their brokers, to automatically sell a stock if it falls a certain amount. But be careful – great stocks sometimes can dip sharply and temporarily.