Don't blindly listen to mgt - Kaiser Aluminum example

$Kaiser Aluminum(KALU)$

Management all try to put a positive spin whenever they communicate with investors. So you should take every thing you read in the Annual Reports with a pinch of salt. My motto is "Check and verify." I will share with you an example of this with Kaiser Aluminum (KALU)

KALU is a US based aluminum company. Aluminum is of course a cyclical commodity. A fundamental part of KALU's business model is to remain neutral to the impact of fluctuations in the market price for aluminum and certain alloys. The goal is to earn profits predominately from the conversion of aluminum into semi-fabricated mill products.

So it tries to negate the cyclical impact with its “metal price neutral” approach using Conversion Revenue as the key top-line metric. So mgt always talk about how this is a good strategy etc..

I decided to check how the company had done based on this metric. I compared Conversion revenue aluminum prices expecting low correlation. Refer to the Chart below

KALU Conversion c/w Aluminum pricces

‌But my analysis showed that there is a 0.85 correlation between Conversion Revenue and aluminum prices making KALU a cyclical company. So it has not really negated the cyclical effect. Any analysis and valuation of KALU must be based on its performance over the aluminum price cycle.

Moral of the story....don't just accept what is reported in the Annual Reports or what management says. Verify with numbers. Make sure that what is presented is not PR spin.