Following a 60% decrease, what's the subsequent plan for Alcoa?
Alcoa has plummeted nearly 60% from its peak of $92 in March 2022, whereas the S&P500 index has surged by 33% during the same period. Alcoa's stock price drop is more pronounced than its competitors, such as Century Aluminum Co, which has dipped by 33%, and Kaiser Aluminum Corp, which has decreased by 28%. Alcoa is a prominent name in the aluminum products and alumina production sector. The Alcoa stock decline has been gradual due to various macroeconomic factors hindering the aluminum price surge observed during the Covid-19 pandemic. Aluminum prices have tumbled from a high of approximately $4,000 per metric ton in March 2022 to around $2,580 currently.
Early 2022 witnessed strict COVID-19 lockdowns in China, impacting its manufacturing and construction sectors. As one of the leading aluminum consumers globally, China's slowdown in demand negatively affected global aluminum prices. Although demand has gradually increased, the continuous impact of COVID-19 restrictions and shifting industrial priorities is restricting recovery. Furthermore, the energy-intensive nature of aluminum production is affected by volatility in energy prices, especially natural gas and electricity, due to geopolitical factors such as the Russia-Ukraine war.
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What triggered Alcoa's Profit Fall?
The company's profit decline in recent years can be attributed to a decrease in its EBITDA, falling from $2.2 billion in 2022 to $0.5 billion in 2023. Revenues also dipped by approximately 15% between 2022 and 2023. The poor performance is primarily due to lower year-over-year average realized prices for aluminum and alumina, along with higher production costs in the Alumina segment.
Although AA stock has displayed subpar growth in recent times, the Trefis *High Quality Portfolio*, consisting of 30 stocks, has delivered better returns with lower risks compared to the benchmark S&P 500 index during the past four years.
Given the current uncertain macroeconomic environment with rate cuts and multiple wars, there's a possibility that AA may encounter a similar situation as in 2022, 2023, and 2024, underperforming the S&P over the next 12 months, or it may recover.
Predictions Regarding Alcoa's Stock
We remain optimistic about Alcoa's stock, mainly due to increasing alumina prices, enhanced aluminum production, and significant acquisitions. Alcoa's aluminum production increased by 3% sequentially from the fourth quarter of 2022 to 559,000 metric tons. The high alumina prices combined with low raw material costs boosted EBITDA notably, and this upward trend is anticipated to continue in the following quarters. Net income grew from $30 million in the previous quarter to $135 million in Q3 of 2024. Earnings per share (EPS) increased from $0.16 per share in Q2 2024 to $0.57 in Q3 2024. In addition to completing the acquisition of Alumina Ltd. on August 1, Alcoa's economic exposure to the alumina market has expanded significantly, with the production capacity increasing from 2 million metric tonnes to approximately 6 million metric tonnes. This consolidation of the companies' tax structures is projected to generate cash tax savings of around $100 million within the next 12 to 18 months.
Aluminum serves essential roles in industries such as automotive, aerospace, construction, packaging, and renewable energy. As the world evolves towards greener technologies, the demand for aluminum is expected to increase. Alcoa's strong balance sheet and facilities primarily based in the U.S., leading to lower energy costs than European competitors, make it fundamentally strong in the aluminum sector. Alcoa's focus on improving operational efficiency and reducing costs through refining production capacity, streamlining operations, and concentrating on high-margin products is commendable.
Alcoa's commitment to enhancing its sustainability profile by reducing carbon emissions and investing in green technologies could contribute to improved long-term profitability and position the company well as there's an increase in demand for sustainable products. Our valuation of AA stock is set around $46 per share, representing a 25% increase over the current market price. To get a closer glimpse of our price estimate for Alcoa and its comparison with peers, check out our article on *Alcoa valuation. Moreover, see our article on Alcoa Revenue* for details on how Alcoa's revenues are forecasted to evolve.
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The current decline in Alcoa's stock price, with a decrease of nearly 60% from its peak of $92 in March 2022, can be analyzed using Trefis' financial models for Alcoa stock (AA stock). According to these models, Alcoa's earnings are expected to improve due to factors such as increasing alumina prices, enhanced aluminum production, and significant acquisitions.
Despite Alcoa's poor performance in recent years, as indicated by its falling EBITDA and revenue figures, the Trefis "High Quality Portfolio" containing 30 stocks, including AA stock, has delivered better returns with lower risks compared to the benchmark S&P 500 index over the past four years.
