NOVELIS INC. $24 (Toronto symbol NVL; Conservative Growth Portfolio, Manufacturing & Industry sector; SI Rating: Average) is the world’s largest maker of rolled aluminum products, including beverage cans, packaging and automotive parts.
The company recently restated its earnings to correct accounting problems related to its spin-off from Alcan. It now earned $1.21 a share (total $90 million) in 2005, up 63.5% from $0.74 a share ($55 million) in 2004 (all amounts except share price in U.S. dollars). Sales rose 7.7%, to $8.4 billion from $7.8 billion.
Novelis now buys aluminum to make its products. But 20% of its sales are under contracts that limit its ability to pass along rising aluminum costs to its customers. Novelis is phasing out this practice, a remnant from its days as part of Alcan, and aims to eliminate half of its price-capped contracts by the start of next year.
Although Novelis also hedges its exposure to aluminum prices, it now expects to lose money in 2006. That has forced it to cut its quarterly dividend, from $0.09 U.S. a share to $0.01 U.S. The new annual rate of $0.04 U.S. yields 0.2%.
In light of its recent problems, the stock has held up nicely. It’s still cheap in relation to its sales of around $113 U.S. a share, and at 10.3 times its annual cash flow of about $2.10 U.S. a share.
Novelis is a buy for long term gains.
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