Friday, February 8, 2019

Alcoa Looks Undervalued, But With Some Significant Asterisks

There are some investors who simply refuse to consider highly cyclical stocks like Steel Dynamics (STLD) or Alcoa (AA), and a quick look at the recent chart outlines some of the reasons why. With Alcoa’s high sensitivity to alumina and alumina prices (a roughly 5% change in aluminum prices can move EBITDA by close to 10%), and the ongoing volatility of the commodity markets, it’s a tough company to model accurately beyond a few quarters. Making matters worse, the valuation norms for the shares seem to have broken down over the least year or so, making it even more challenging to come up with a good sense of where the shares should trade.

When all else fails, I come back to free cash flow, and I do believe Alcoa is undervalued here. Current aluminum prices don’t appear to be sustainable, and Alcoa should see more capacity leave the market in response … though the timing there is of course uncertain. I believe the shares are undervalued below the mid-$30’s, but I’d never consider this as more than a trade.

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Alcoa Looks Undervalued, But With Some Significant Asterisks

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