Aluminum prices have seen a significant decline in recent months, dropping from a high of around $3,800 per metric ton in March 2022 after the start of the Russian invasion of Ukraine to levels around $2,500 as of early July. Prices of the metal fell by nearly $2,200 at the end of September. There are growing concerns about the global economy as the steady increase in interest rates by central banks is expected to affect global growth and demand for industrial goods such as aluminum. Moreover, aluminum production from China has also increased with new production capacity coming online after delays and production cuts that occurred during 2021. This is likely to put some pressure on Alcoa’s price realization. Moreover, Alcoa’s profitability is likely to be affected by higher energy prices and higher input costs.
However, we remain positive about AA stock. Consensus estimates are earnings of about $6.50 per share for the full year, which means the stock is trading at about 6 times forward earnings at the current market price of $38 per share. Although cyclical stocks typically experience lower multiples when markets anticipate earnings and returns to peak, there are two trends that still make Alcoa a good value. Alcoa stock is already down about 60% from levels seen in March 2022 and is still down about 37% year-to-date. Moreover, increasing investments in the renewable energy sector including electric vehicles, charging infrastructure, solar power plants and wind energy remain secular drivers of aluminum demand. We also believe that Alcoa has an advantage over other aluminum producers due to its strong balance sheet (net debt of only about $163 million) and also due to the fact that its facilities are largely located in the US, which results in lower energy costs compared to our highly dependent European competitors. on Russian natural gas.
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