Stock Analysis & Ideas

Alcoa Stock: High-Need Commodity, Easy to Like

Based in Pittsburgh, Alcoa (AA) is among the largest aluminum producers in the U.S. I am bullish on the stock.

Aluminum is one of those elements that people don’t think about often, but it’s necessary to our lives and has numerous uses. From window frames and kitchen utensils to airplane parts, aluminum has a variety of essential applications.

If you’re seeking exposure to the aluminum market through a major U.S. stock exchange, AA stock is as solid a pick as any. After all, Alcoa is a giant company with staying power. Some people might even consider Alcoa to be an icon among American businesses.

Commodities have been on fire in 2022, but not every commodities-market asset deserves your consideration and capital. With that in mind, let’s apply an informed and skeptical analysis to Alcoa, the aluminum-industry legend.

What’s Driving Aluminum Prices?

Knowing AA stock means knowing the state of the aluminum market, plain and simple. So, what’s the scoop with aluminum now?

Just recently, aluminum futures traded near $3,250 per tonne (metric ton). Whether this is bullish or bearish depends on one’s point of view. Short-term, $3,250 indicates a sharp price pullback, due to weak demand for aluminum in China and Japan, and possibly also due to China ramping up its aluminum exports.

On the other hand, if we look back to a year ago, we can see that aluminum futures cost around $2,400 per tonne in late April of 2021. In other words, aluminum is in a longer-term bull market until proven otherwise, despite the recent short-term pullback. It’s not difficult to pinpoint the culprit here, as concerns over supply disruptions from Russia have put upward pressure on aluminum prices.

The Alcoa stock price hasn’t exactly moved in lockstep with aluminum prices, but the general trajectories have been remarkably similar. Thus, if you’re going to be bullish on AA stock, you’d better also be bullish on the aluminum industry.

The aluminum market is set to achieve a value of $235.8 billion by the year 2025. This figure clearly indicates strong, steady expansion for the world’s aluminum market. Among the positive contributing factors will be increasing demand for aluminum in China, as well as the need for high-strength aluminum in aerospace. Also, don’t be surprised if there is a greater demand for aluminum in the making of die-cast products in the automotive industry.

These factors will undoubtedly benefit Alcoa. As long as aluminum remains in high demand and there’s no oversupply, the aluminum price will likely stay elevated long term. That’s not great for the consumers, of course, but it’s good news for Alcoa’s investors.

Strong Quarterly Results

The headline of Alcoa’s most recently published quarterly financial press release says it all: “Alcoa Posts Strong Quarterly Results Supported by Robust Aluminum Pricing.” Clearly, the company is acknowledging the positive impact of high aluminum prices on Alcoa’s Q1 2022 results.

No matter how you slice it, Alcoa had a blockbuster first quarter of the year. First of all, the company swung from a $392 million net earnings loss in Q4 2021 to a net gain of $469 million in Q1 2022. That’s quite an improvement, you must admit, and it represents a quarterly net-income record for Alcoa.

Alcoa president and CEO Roy Harvey acknowledged this achievement while also adding an impressive fiscal stat of his own. 

“We had an excellent start to the year with record profitability in the first quarter, including quarterly EBITDA that surpassed $1 billion for the first time in our history,” he said.

However, Harvey also acknowledged that Alcoa “captured the benefits of strengthened aluminum pricing.” So again, the destiny of AA stock is closely tied to the ups and downs of the aluminum price.

Wall Street’s Take

According to TipRanks, AA is a Moderate Buy, based on seven Buy and six Hold ratings. The average Alcoa price target is $95.54, implying 41.8% upside potential.

The Takeaway

Wall Street’s analysts envision strong upside potential for Alcoa stock. Still, if you’re going to hold the shares, you’ll definitely want to keep a close watch on the aluminum market.

Wherever aluminum goes, the AA stock price is likely to follow. The correlation isn’t perfect, but it’s strong and an oversupply of aluminum, or a decrease in demand for aluminum, could have a negative impact on Alcoa stock.

On the other hand, the data tends to suggest a robust future for the aluminum market in the coming years. Also, it’s encouraging that Alcoa has shifted from a net earnings loss to a net profit.

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