Alcoa Stock Up 75% In One Year, What’s Next?

Alcoa (NYSE:AA) posted a better-than-expected set of Q3 2024 results, with EBITDA rising to $455 million, which is a 6.5x increase year-over-year. Alcoa stock has also fared well in the last 12 months, rising by 75%. The company’s guidance for 2024 was also better than anticipated, with alumina shipments projected to stand at between 12.9 million to 13.1 million metric tons, marking an increase of 0.2 million metric tons from the prior estimations, due to higher trading volumes. Shipments for the aluminum segment are projected at between of 2.5 to 2.6 million tons, same as prior estimates. With higher shipments and lower production costs, EBITDA is expected to see further improvement – so what does this mean for Alcoa stock?

The increase in AA stock over the last 3-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 159% in 2021, -23% in 2022, and -24% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period.

Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could AA face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

We are positive on Alcoa stock, primarily due to rising alumina prices, increasing aluminum production as well as important acquisitions made. Aluminum production increased for the eighth straight quarter, starting in the fourth quarter of 2022. Production in the aluminum segment increased 3% sequentially to 559,000 metric tons. The high alumina prices coupled with low raw material costs helped increase the EBITDA substantially and we expect this trend to continue in the coming quarters as well. Net income increased from $30 million in the previous quarter to $135 million in Q3 of 2024. EPS increased from $0.16 per share in Q2 2024 to $0.57 in Q3 2024. Additionally, Alcoa completed the acquisition of Alumina Ltd. on August 1, resulting in an increase in economic exposure to the alumina market. Prior to the acquisition, Alcoa had third party sales of only 2 million metric tonnes of production, which has now gone up to approximately 6 million metric tonnes. The consolidation of the tax structure of the two companies is expected to result in cash tax savings of approximately $100 million over the next 12 to 18 months.

Rising investments in the renewable energy sector including electric vehicles, charging infrastructure, and solar and wind power plants remain secular drivers for aluminum demand. We think that Alcoa has an edge over other aluminum producers given its strong balance sheet and also due to the fact that its facilities are based mainly in the U.S., resulting in lower energy costs compared to European rivals.  Alcoa has also been looking to boost its productivity and optimize its assets. After revisiting our price estimate post Q3 earnings, we now value AA stock at around $46 per share, which is around 10% ahead of the current market price. See our analysis of Alcoa valuation for a closer look at what’s driving our price estimate for Alcoa and how Alcoa’s valuation compares with peers. Also, see our analysis of Alcoa Revenue for more details on how Alcoa’s revenues are expected to trend.

[1] Returns as of 10/24/2024
[2] Cumulative total returns since the end of 2016

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