Alcoa Stock Price Up 41% in 2022– Time to Buy AA Stock?

While the broader markets have looked weak in 2022, things have been quite good for commodity stocks. Copper, aluminum, steel, nickel, and palladium are among the commodities that have spiked in 2022 amid the Russia-Ukraine war. Alcoa, which is the largest aluminum producer in the US, is up 41% YTD even as the S&P 500 is in the red.

Alcoa had split its value-add fabrication business in 2016. The company is now a pure-play aluminum producer having integrated operations. The company has bauxite mining, alumina refining, and aluminum smelting operations. Aluminum prices hit their all-time highs in March but have since come off. However, the prices are still quite high on a YoY basis.

Aluminum prices have been strong amid the Russia-Ukraine crisis

Aluminum prices have spiked after Russia’s invasion of Ukraine. There are two main reasons why prices have spiked. Firstly, Russia is among the top three aluminum producers globally, and Russian company Rusal is among the largest producers globally. As the West continues to impose more sanctions on Russia, there are fears over aluminum’s supply. Here it is worth noting that while the Western countries have imposed crippling sanctions on Russian banks and oligarchs, they have been circumspect about sanctioning its commodity exports.

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Western sanctions

Given the already high inflation in developed countries, higher commodity prices could push prices even higher. Nonetheless, aluminum prices have spiked on supply fears. Notably, in its Q4 2022 earnings call, Alcoa had warned of a disruption in global aluminum supply in case Russia-Ukraine tensions escalate. Since then, not only has Russia invaded Ukraine but the war has shown no signs of ending.

Secondly, the Ukraine-Russia conflict has led to a rise in energy prices which has also impacted aluminum prices. Aluminum production is energy-intensive and the rise in energy prices leads to cost-push inflation for producers. However, being an integrated aluminum producer, Alcoa is better placed to handle the input cost inflation as compared to upstream aluminum producers.

Alcoa would release its earnings next week

Alcoa would release its Q1 2022 earnings on 20 April.  Analysts polled by Koyfin expect the company to report revenues of $3.44 billion in the quarter. It had posted revenues of $2.87 billion in the corresponding quarter in 2021. In the full year 2022, analysts expect Alcoa to report revenues of $14.45 billion, 19% higher than in 2021.

Meanwhile, the steep rise in aluminum prices is expected to lead to a sharp rise in Alcoa’s profitability. It is expected to post an adjusted EBITDA of $1.07 billion which is almost double the $521 million that it posted in the first quarter of 2021. In the full year 2022, Alcoa is expected to generate an adjusted EBITDA of $4.62 billion, 67% higher than in 2021. Notably, the rise is coming from a high base as its earnings had rebounded in 2021 amid the rise in aluminum prices.

Fourth-quarter earnings

Alcoa’s Q4 2021 earnings were also quite strong and it reported revenues of $3.3 billion in the quarter, which was 7% higher than the previous quarter and the highest quarterly revenue in three years. The company posted an adjusted EBITDA of $896 million while the adjusted net income was $475 million. Both these metrics were a record.

Alcoa reported operating cash flows of $565 million in the quarter and ended the year with total cash of $1.9 billion. The company has been taking several portfolio actions to streamline its assets. During the quarter, it sold the Rockdale site in Texas for $240 million. It also announced the permanent closure of the Wenatchee smelter. It also reached an agreement in Spain to curtail the San Ciprián smelter.

Alcoa has also been making voluntary contributions to the pension plan. After the spin-off, Alcoa inherited massive pension liabilities of the combined entity. However, thanks to the strong commodity prices over the last two years, the company has been addressing the underfunded pension issue. At the end of 2021, it had U.S. qualified pension liabilities of $2.6 billion, which was almost $2 billion lower than the previous year.

Alcoa has negative net debt

At the end of 2021, it had $1.8 billion in debt which was below its cash holdings. The company has also started to return cash to the stockholders and during the quarter it paid $19 million as dividends and repurchased $150 million worth of its shares.

AA stock forecast

Of the 15 analysts covering AA stock, nine have a buy rating while six have a hold rating. Its average target price of $89.50 is a 6.3% upside over current prices. The stock’s lowest and highest target prices are $55 and $115 respectively.

Meanwhile, after the breathtaking rally over the last few months, Credit Suisse believes that it has run too far and downgraded it from outperform to neutral while lowering the target price from $82 to $68.

“While we see current geopolitical events as driving lasting structural support for aluminum prices … we do believe supply / demand balances will start to normalize in 2H-22 as trade flows are gradually realigned, off-warrant material is monetized, and smelter operating rates sharply recover in China,” aid Credit Suisse analyst Curt Woodworth in a note.

Woodworth expects aluminum prices to come down as geopolitical tensions ease. He also added, “While AA is surely a major beneficiary from the current bullish price trends in aluminum/alumina, they do face increased inflationary pressures in caustic soda and carbon.” Both caustic soda and carbon are key inputs in aluminum production.

Alcoa stock long term forecast

Aluminum is among the metals whose demand would receive an impetus from the global transition towards green energy. Also, China has closed down a lot of its polluting aluminum capacity and we’ve seen a structural slowdown in its aluminum exports. On the flip side, a slowdown in the Chinese economy, which is the world’s largest aluminum producer, consumer, and exporter, is a risk for aluminum and by its extension Alcoa.

That said, aluminum’s medium to long-term outlook looks strong. In the near term, the movement in energy prices and the geopolitical developments could continue to impact prices though.

Should you buy AA stock?

Alcoa stock trades at an NTM (next-12 months) EV-to-EBITDA multiple of 3.57x. The multiples suggest that markets don’t believe that the rise in aluminum prices would sustain. However, while aluminum might not stay at these levels for long, we could see prices stay at elevated levels for quite some time. Alcoa is among the companies through which you can play the rise in aluminum and alumina prices.

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