AA Stock Forecast: Good Time to Move Up.
This AA Stock Forecast article was written by Dima Shirikov – Financial Analyst at I Know First.
Highlights:
- Since the beginning of 2021, the AA Stock price has changed by more than 56%, from $ 25.99 to $ 40.66 per share.
- Alcoa with an ROE of 12.37% is one of the most efficient companies with profit generation ability from the equity in the Metals and Mining Industry.
- By 2027, global aluminum consumption is expected to grow by more than 6% per year.
Overview
Alcoa Corporation is an American metallurgical company that produces primary aluminum, develops mineral deposits: mainly bauxite and alumina. Creates technologies for processing, smelting, and manufacturing metal products. On November 1, 2016, Alcoa Inc. split into two new entities: Alcoa Corporation, which is engaged in the mining and manufacture of raw aluminum, and Arconic, which processes aluminum and other metals. In March 2020, when the WHO announced the coronavirus pandemic, AA Shares were trading at $ 5.17 per share. Since then, as the economy recovers, Alcoa Corporation shares are up 680%. Since the beginning of 2021, the share price has changed by more than 68%, from $ 25.99 to $ 43.87 per share. This rapid recovery was due to the rise in industrial metals prices, in particular, aluminum renewed its 4-year high of $ 2,620.
Nevertheless, the company’s shares have already shown steady growth, significantly outperforming the market since December 2020.
Optimizing operation portfolio in the uncertainty time
Even before the COVID-19 pandemic, Alcoa began restructuring assets and selling non-core properties. This helped the company to cope with unexpected lockdowns and severe declines in product demand around the world. The rapid recovery in demand after the pandemic led to a 25% increase in revenues in the first half of the year compared to the first half of 2020. The most impressive growth in sales of the main product – aluminum, amounted to almost 37%.
(Figure 1 – Alcoa’s Sales by product division in million US dollars (Six months ended))
Alcoa completed the sale of Warrick Rolling Mill for total consideration of approximately $670 million. It includes the assumption of $66 million in other postretirement benefit liabilities. Also in June, the Company completed the sale of the previously closed Eastalco Aluminum smelter site in the state of Maryland in a transaction valued at $100 million. Upon closing of the transaction, the Company received $94 million in cash. In August 2021, Alcoa starts to work at a new bauxite residue filtration plant at its Poços de Caldas refinery in Brazil. It will reduce water consumption and require less land to store residues. The cost of the project is approximately $ 60 million. Construction is expected to be completed in the second quarter of 2022 with commissioning by the end of the year.
Alcoa is actively engaged in the development of its products following modern requirements. Alcoa announced the start of construction on the first commercial-scale prototype cells of ELYSIS’ inert anode technology, at Rio Tinto’s Alma smelter in Saguenay-Lac-Saint-Jean, Quebec. ELYSIS aims to revolutionize the traditional process to make primary aluminum, eliminating all direct greenhouse gases and instead of producing pure oxygen. Also, Australian Renewable Energy Agency (ARENA) has granted Alcoa of Australia $8.8 million to test the potential use of renewable energy in a process known as Mechanical Vapor Recompression (MVR). Alcoa of Australia conducts technical and commercial studies to adapt MVR technology to refining. Electricity sourced from renewable energy would power compressors to turn waste vapor into steam, which would then be used to provide refinery process heat.
Today manufacturers and consumers continue to demand the use of more sustainable raw materials across the global supply chain. Alcoa announced that it will supply EcoLumTM, its low-carbon primary aluminum, to WKW Extrusion’s Erbslöh Aluminium for its new brand of semi-finished extrusion alloys. Erbslöh Aluminium, which is based in Germany, will use Alcoa’s low-carbon EcoLumTM for its NEWTRAL® brand of alloys. The new brand is designed with a specific focus on reducing carbon dioxide emissions for customers in the automotive, industrial, furniture accessories, and consumer electronics industries. Alcoa’s EcoLum aluminum, which has a carbon footprint that is approximately three and a half times better than the global average, is a key enabler in allowing manufacturers to reduce their emissions profile. Together, Alcoa and Erbslöh Aluminium products will help downstream industries improve the environmental footprint of their products and supply chains with low-carbon, sustainably produced aluminum.
Profitability in the time of global changes
According to GuruFocus, Alcoa is one of the most efficient companies with profit generation ability from the equity in the Metals and Mining Industry. Alcoa’s ROE of 12.37% is much higher than most of its peers and the industrial average. Alcoa’s operating Margin of 10.39% is also much better than the industrial average (almost 2 times). For funding their business, Alcoa actively uses debt financing. Alcoa’s Equity-to-Asset ratio is 0.26 that worse than around 85% of companies in the Metals and Mining industry. It should be noticed that the company generates enough amount of operating income to cover its debt obligations (Interest Coverage is 5.63). On the one hand, a high level of debt makes the company more vulnerable to possible economic shocks and may limit the possibility of attracting additional financing for the implementation of new investment projects. On another hand, Alcoa is one of the efficient companies in the industry that can successfully service their debt and realizing investment projects even in the pandemic time.
(Figure 2 – ROE and Operating Margin)
By comparing Alcoa’s P/B and P/S valuation ratios with the competitors we can sum up that AA stock is undervalued. Moreover, only Alcoa and Costellium SE are profitable and as a consequence have positive P/E ratios.
(Figure 3 – P/E, P/S, P/B Ratios)
In the third quarter of 2021, Alcoa anticipates another strong quarter based on continuing forecasts for economic recovery and solid global demand across key end-use sectors. The Company also anticipates continuing inflationary pressure on raw materials and energy. The Company’s 2021 shipment outlook for all segments is expected to improve: Bauxite by 0.1 million dry metric tons to between 50.0 and 51.0 million dry metric tons; Alumina by 0.1 million metric tons to between 14.1 to 14.2 million metric tons; and Aluminum by 0.2 million metric tons to between 2.9 and 3.0 million metric tons.
By 2027, global aluminum consumption is expected to grow by more than 6% per year. Also, aluminum prices will likely continue to rise due to the inevitable inflation caused by the Fed’s soft monetary policy, which increased the money supply during the pandemic by more than 30%. In the long term, aluminum prices will be strongly supported by the decision of the Chinese authorities to limit domestic aluminum production to 45 million tons per year. As of March 2021, aluminum smelting in China reached 38 million tons, so the limitation of capacities can lead to a shortage of metal in the country in the foreseeable future.
Technical Analysis
The weekly chart shows that AA stocks are near a strong resistance level of $ 40-41, which they have been trying to overcome since the beginning of May this year.
(Figure 4 – Alcoa 1W: September 2018 – August 2021)
Stocks were stuck in a wide corridor of $ 31.49- $ 41.33, even though they pulled up several times beyond the resistance zone. Perhaps in recent days, we have seen the exit of the stock from a long sideways. However, the uptrend continues in stocks, which is confirmed by EMA-50 days, 100 days, and 200 days.
(Figure 5 – Alcoa 1D: November 2020 – August 2021)
Conclusion
Alcoa continues to expect a strong 2021 based on the continued economic recovery and increased demand for aluminum in all end markets. The company can service its debt even though it is engaged in optimizing its operation portfolio because it is one of the most resilient in the industry. I also have a positive look at the company and think that AA has an upside of about 10-30% because the Q2 report was strong and raw materials prices at their maximum. While maintaining a favorable market environment, the goal for the year is $ 48-56 per share.
It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the AA stock forecast. AA has a strong signal for all time horizon forecasts.
Past Success With AA Stock Forecast
I Know First has been bullish on Alcoa’s shares in past forecasts. On our March 17, 2021 premium article, the I Know First algorithm issued a bullish Alcoa stock forecast. The algorithm successfully forecasted the movement of Alcoa’s shares on the 3-month time horizon. Alcoa’s shares rose by 13.75% in line with the I Know First algorithm’s forecast.
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