Alcoa Stock: A Buy on Prolonged Aluminum Supply Disruption (NYSE: AA)
Alcoa (NYSE: AA) is an American industrial company based in Pittsburgh, Pennsylvania, and was established in 1888. The company as it is known today is the mining and manufacturing side of the business, while its refining and the processing segment operates as arconic (NYSE: ARNC). The parent company branch took place in 2016, with both parties trading publicly on the New York Stock Exchange. Alcoa’s name is derived from the expression Aluminum Company of America, because aluminum is the main product it manufactures. Currently, Alcoa is one of the largest aluminum producers in the world and the largest producer in the United States. Mining companies like Alcoa first made headlines when supply constraints began to draw down inventories, which caused a massive increase in the market values of production and, by extension, their stock prices. Today we will be reviewing this mining stock and discussing what investors can expect in the future.
Commodity prices have been a boon
With increased manufacturing demand during the COVID-19 pandemic and challenges with global supply chain logistics, the price of aluminum has surged.
Like other commodities, the price of metal has risen as the economy reopened, particularly as manufacturing returned to somewhat normal levels. Like wood at the start of 2021, aluminum’s rally has been relentless. This has seen the metal surpass its 2008 highs and nearly triple from March 2020 lows. Although the price has pulled back slightly, supply imbalances should continue to support high prices. Alcoa shareholders have reaped the benefits of the exorbitant price as shares have returned more than 1,500% from pandemic lows.
Like many companies that have experienced a downturn during the pandemic, Alcoa recently announced that it will launch a new share buyback program and reintroduce its quarterly dividend to $0.10 per share.
Alcoa delivered a stunning performance in the fourth quarter of 2021. Revenue was $948 million, up 40% from the same period last year, with adjusted EBITDA up $168 million to $896 million sequentially and $535 million year-over-year. Those are stellar growth numbers, but this is a mining company, not a tech company. Investors must therefore ask themselves if prices will soon come back down to earth? In short, no. A fundamental shift in aluminum production has created this deficit, and it doesn’t appear to be closing any time soon. It would not be prudent for investors to expect another year of disorderly bullish price action like 2021. The North American market appears to be strong, at least through calendar year 2022, but the European market is much smoother.
As China looks set to maintain capacity constraints and European smelters reduce combined production at already low inventory levels, I expect aluminum prices to stabilize at high levels for the future. calendar year 2022.
This includes the expectation that producers will increase their ability to capitalize on these attractive commodity prices. In fact, Alcoa has already started to adapt. Management is implementing a new strategic operating plan that will aim to eliminate debt and reopen smelter sites that will nearly double aluminum and alumina production capacity. There is also Alcoa’s new Sustana product line which is helping to provide sustainable, low-carbon alumina and aluminum products with the goal of meeting a global standard of carbon neutrality over the next two decades. It is the world’s first low-carbon alumina product line and creates its aluminum product line from at least 50% recycled materials.
Alcoa is also the world’s second largest producer of bauxite, a naturally occurring mineral that is the primary ore used for aluminum production. Alcoa wholly or partially owns seven bauxite mines around the world and is a major raw material supplier for other aluminum producers.
Assessment and expectations
Despite the massive surge, Alcoa’s valuation is far from stretched. The stock is currently trading at a P/E ratio of 11.91 and a forward P/E of 7.07. As you might have guessed, Alcoa has recently made a habit of demolishing earnings expectations, beating consensus estimates in each of the past four quarters. Naturally, this is what investors want to see more of. Due to recent performance, expectations have been adjusted, but Alcoa may continue.
EPS estimates remain strong through calendar year 2023, with the most notable drop occurring in 2024. This is a welcome sight for investors as it appears that good revenue performance continues.
To add some color to the valuation story, we’ll use Finbox to calculate a fair value. The general expectation is that the strong trends will continue through 2023, with a noticeable decline in 2024. By calendar year 2025, we expect the supply shock to be completely behind us, driving a return to normal for Alcoa’s revenues. .
We get an implied fair value of $124.69, and when we take into account a 20% safety margin, we get a fair value of just around the $100 mark, which is almost a 19% upside. .
I encourage you to enter your estimates into the model. The model is here.
Alcoa enjoys extremely favorable global supply chain circumstances in its space. These conditions will at least partially persist through 2022, which is great news for investors. The title contains a lot of good news, but there will probably be more upside. Therefore, I rate Alcoa as a To buy with a long-term price target of $100 per share.