Wednesday, February 25, 2009

Another One I Own: CENX - A "Buy" Analysis

CENX equity is essentially a call option on aluminum price recovery. CENX reported adjusted EPS of -$0.54 vs -$0.47 consensus recently with revenues in-line. It should be noted that if aluminum prices avg $0.65/lb, the current liquidity would be used up in about 1.4 years, and the equity would be worthless; however, if the aluminum market firms over this time back to $0.85/lb, I estimate that CENX breaks even on a cash flow basis; under their long-term price assumption of $0.90/lb to $0.95/lb, the equity could be worth closer to $20/share. I believe that the stock is essentially a call option on an aluminum price recovery, with potential for the expiration date of the option to be extended, making for a potential attractive risk/reward. However, are there any positive drivers for aluminum in the short term? Possibly the near-term outlook is negative for the stock. Inventories, for the time being, appear to be building. I am patient; I own CENX.

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