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Kaiser Aluminum - Roll or Rolled

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May 23, 2010 – Comments (2) | RELATED TICKERS: KALU , AA , A

There are 349 companies on our watch list from the Basic Industries Segment of the U.S. economy. Admittedly we have no clue what the vast majority of any of the 2600 companies on our watch list actually do.

What we do know is that every Saturday morning, we click a button and the weekly closing price for all 2600 companies, is updated, including the 349 in the Basic Industry Segment.

Just as we have no clue, about what all of the companies on our watch list actually do, we have no idea why the little voice that lives in all of the transistor radios in America decided that each quarterly earnings season should start with Alcoa, Inc. (NYSE: AA)? Why not Agilent Technologies, Inc. (NYSE: A), since the letter "A" is only used once in their ticker symbol.


No matter, Alcoa has been chosen by the transistor radio business community and that's that...even though we think Kaiser Aluminum Corporation (Nasdaq: KALU) would make a much better investment. Pretty cool transistor transition, ey?

And while we love the city of Pittsburgh, we just think it makes far better sense to invest in a company headquartered in an earthquake zone in southern California.

Basis
Financial information related to Kaiser Corporation, contained in this report, is based on the company's most recent SEC Form 10-K filing for fiscal year ending December 31, 2009, as filed with the Securities and Exchange Commission on February 23, 2010.

What They Do
Kaiser Aluminum is a manufacturer of semi-fabricated specialty aluminum products for aerospace / high strength, general engineering and custom automotive and industrial applications.

The company also owns a 49% interest in Anglesey Aluminum Limited, which owns a facility in Holyhead, Wales that had operated as an aluminum smelter until September 30, 2009 and commenced remelt and casting of secondary aluminum products in the fourth quarter of 2009.

The company has one reportable segment, Fabricated Products. The Fabricated Products segment is comprised of the company's production facilities and sells value-added products such as heat treat aluminum sheet and plate, extrusions and forgings which are used in a wide range of industrial applications, including aerospace, defense, automotive and general engineering end-use applications.

The company also has three other business units which are combined into All Other. All Other is comprised of all business activities relating to Anglesey’s smelting operations, the purchase and sale of value-added secondary aluminum billet produced by Anglesey for which the company receives a portion of a premium over normal commodity market prices.

In addition, All Other includes the company's hedging activities in respect to its exposure to primary aluminum price risk and the British Pound Sterling exchange rate risk relating to Anglesey’s smelting operations through September 30, 2009, as well as corporate and other activities, expenses of which are not allocated to other business units.

The company was founded in 1946 and emerged from Chapter 11 Bankruptcy on 2006.

Short-Term Investment
Over the past month, the stock price has moved from the mid $32s, through the mid $41s, only to close recently in the mid $35s. With the trend of the stock continuing downward, the transistor static is telling us that the stock is currently trying to form an oversold bottom, something it may take another week to 10 days to actually do.

Based on a recent close of $35.50 and first resistance at $38, a 7% increase from the recent close, and support at $29, an 18% decline from the recent close, we think there is more downside risk with the stock at the moment, than upside reward.

Long-Term (5 Year Hold) Investment
With proper due diligence, the company has the prospect of becoming a very good long-term investment.

We noticed there is very little spread between the Days Payables are outstanding and the Days Receivables are outstanding, which tells us the company is paying their bills timely, and more importantly, the company' customers are paying their bills timely.

We note that the company's Current Ratio at 2.44 was at what we consider investment level, but the company's Quick Ratio at 0.94 and Cash Ratio at 0.25, were not.

We also note that debt was reduced by almost $150M during FY09, leaving the company with Total Debt of $7.1M at the end of FY09, an amount the company should have no trouble managing, especially with Free Cash Flow of $2.25 per share.

Valuations
Based on our review of the company's FY09 financial information, we think a Reasonable Value Estimate for the stock is in the $90-$105 range, and that a reasonable Entry Target is between $35 and $50.

It is important to understand that such a valuation is an estimate of where we think the price of the stock might be 5-6 years from now, and investors with shorter time horizons should enjoy our article and then run screaming into the night.

Final Thoughts
We believe management is in the game.

During FY08 the company wasted about $29M repurchasing company stock, but realized timely, that the economy was about to go nips up and decided to fore go that worthless activity during FY09.

We are constantly on the lookout for this sort of forward thinking, and finding it always gives us a warm fuzzy feeling, sort of like when we spill hot chocolate down the front of our pants, or when we replace the battery in our transistor radio and once again hang it next to the fuzzy dice on our rear view mirror.

Wax

To download the Wax Ink Kaiser Raw Value Worksheet, please click here.

2 Comments – Post Your Own

#1) On May 23, 2010 at 11:14 AM, Teacherman1 (57.22) wrote:

Good post WAX. Don't necessarily agree with you conclusions, but lots of good information and an excellent insight into your thought process.

Maybe it has something to do with our relative ages and investing "time frames".

Keep up the good work, and keep posting. 

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#2) On May 23, 2010 at 11:43 AM, wax (97.09) wrote:

Teach;

Yep...being an old dude sux at times. But thanx for the comment I always appreciate different points of view...they may make me think and that keeps me young.

Wax

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