Alcoa Prospering With Tight Aluminum Markets And Past Efficiency Efforts

 

I’ve liked Alcoa (AA) for a while, largely due to the company’s stringent self-improvement efforts, including shedding lower-return producing assets, selling non-core assets, and building up its green (or at least greener) production capabilities. I didn’t expect quite this level of aluminum price strength in 2021, though, and there are increasingly compelling arguments for a “higher for longer” scenario that could lead to significant free cash flow generation for Alcoa.

Over the long term, just about everybody gets their commodity price predictions wrong, but I think there’s a good argument for aluminum prices of $2,300/mt or higher through 2022. Using my typical multiple of 4.5x forward EBITDA supports a fair value of around $45 on my blended multiyear EBITDA estimate and just over $50 today on 12-month EBITDA.

As in the past, I will warn investors that this is a dangerous stock to consider as a long-term holding. While aluminum prices may well hold up higher for longer, I don’t believe this is a new permanent plateau.

 

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Alcoa Prospering With Tight Aluminum Markets And Past Efficiency Efforts