This AA Stock Forecast article was written by Sergey Okun – Financial Analyst intern I Know First.

Highlights:

• Since November 2020, the company’s stock has grown by 176.65%
• Net cash flow increased by 411% in 2020
• The company is reorganizing its operating portfolio by closing inefficient facilities and selling non-core assets
• DCF supports $46 target stock price for Alcoa Corporation in 2021

Overview

Alcoa Corporation is a vertically integrated aluminum company comprised of bauxite mining, alumina refining, aluminum production (smelting, casting, and rolling), and energy generation. Through direct and indirect ownership, Alcoa Corporation has 28 operating locations in nine countries around the world, situated primarily in Australia, Brazil, Canada, Iceland, Norway, Spain, and the United States. In 2020 the company increased the amount of third-party shipment of aluminum, alumina, and bauxite by 5.5%, 1.8%, and 4.8% respectively. Aluminum is a commodity traded on the London Metal Exchange (LME) and priced daily. Alumina, an intermediary product, is subject to market pricing through the Alumina Price Index (API). As a result, the prices of both aluminum and alumina are subject to significant volatility and, therefore, influence the operating results of Alcoa. Shares of the Company’s common stock are listed on the New York Stock Exchange and trade under the symbol “AA”. Alcoa Corporation, a Delaware corporation, became an independent, publicly-traded company on November 1, 2016. Alcoa Corporation did not pay dividends in 2020, 2019, or 2018.

Time of Threats And Opportunities

The COVID-19 has been creating challenges for the world economy, which could be compared with the period of crisis. The pandemic like any crisis introduces changes and uncertainty which on the one hand could destroy financial well-being, and from another hand gives an opportunity to adapt to changes to get advantages over counterparties in the long-term. So, the key question is how efficient the business could adapt itself to the current economic environment based on its strengths and economic opportunities and combat its weaknesses and outside threats. Below presented information about the structure of Alcoa’s revenue and the main strengths according to business segments.  

The Company has access to large bauxite deposit areas with mining rights that extend in many cases more than 15 years. Bauxite is Alcoa’s basic raw material input for its alumina refining process. Alcoa processes most of the bauxite that it mines into alumina and sells the remainder to third parties. Such in 2020 Alcoa produced 48.7 million dmt of bauxite and only 6.5 million dmt was sold to third parties, other 42.2 million dmt was used for the further production process. Alcoa has access to strategic bauxite mine locations in Australia, Brazil and Guinea, which is home to the world’s largest reserves of high-quality metallurgical grade bauxite. The global bauxite market is expected to grow at a 6.2% CAGR until 2026.

Alcoa’s alumina sales are made to customers all over the world and are typically priced by reference to published spot market prices. Alcoa’s largest customers for smelter-grade alumina are the company’s aluminum smelters. In 2020 Alcoa produced 13 475 kmt of alumina and 4 243 kmt was used for further production of alumina, other part was sold to third parties. The company refineries are strategically located next to low cost bauxite mines, that gives opportunity to alumina refineries to maximize efficiency from these internal mines. The global metallurgical alumina market is expected to grow at a 1.8% CAGR until 2027.

Alcoa’s aluminum segment consists of the company’s worldwide smelting and casthouse system, which processes alumina into primary aluminum. In 2020, the company sold 3 016 kmt aluminum which is 5.5% more than in 2019. The company has a long-term energy arrangement that allows reducing production costs. In 2020 the pandemic created a storm of falling prices. From 4^th March to 8^th April aluminum price dropped by some 15% and recovered back only in August. The daily average price in 2020 was $1718 which was lower than the levels of 2019 and the current year’s which are equal to $1800 and $2065, respectively. The demand for aluminum is sensitive to the demand for the finished goods manufactured in industries, such as commercial construction, transportation, and automotive manufacturing. Also, the demand for aluminum is highly correlated to economic growth. According to the IMF, the global economic growth was estimated as -3.5% in 2020 and should get 5.5% in 2021. Today the global market is expected to grow at a CAGR of 5.0% until 2027.

Market equilibrium of the global aluminum market may be disrupted by non-market forces. The impact of non-market forces on global aluminum industry capacity, such as political pressures or governmental policies in certain countries relating to employment, the environment, or maintaining or further developing industry self-sufficiency, may affect overall supply and demand in the aluminum industry. For example, Chinese excess capacity and increased exports from China of heavily subsidized aluminum products could materially disrupt world aluminum markets causing pricing deterioration.

Restructuring for Further Development in 2021

In 2019, Alcoa Corporation announced strategic actions to drive lower costs and sustainable profitability. The main aspect of this model is reducing overhead costs by a more integrated business model; selling non-core assets; the realignment of the operating portfolio. According to this model, In 2020, the Company sold Gum Springs waste treatment facility in Arkansas and the curtailment of the Intalco smelter in Ferndale (Washington) which reduced the number of total employees by approximately 700. The Company has agreed to sell the Warrick Rolling Mill to Kaiser Aluminum Corporation for $670 mln. The sale is expected to close by the end of the first quarter of 2021. Currently, Alcoa is trying to sell the San Ciprián smelter in Spain to GFG Alvance, but the deal could be canceled if Alvance would not show evidence of its solvency to the Spanish government. Early Alcoa wanted to curtail the 228 000 metric tons of uncompetitive annual smelting capacity at the San Ciprián smelter, however, the workers’ representatives challenged the collective dismissal process in a legal proceeding before the High Court of Justice of Galicia, which ruled in favor of the workers.

The company net margin is -1.83% that worse than 55% of companies in the Metals & Mining industry. However, Alcoa is able to generate strong free cash flow that provides resources to invest into new projects or optimize the operations portfolio based on what is important in COVID-19 time. In 2020 free cash flow was around $730 mln. It is reasonable to expect that it will increase in the future with the world’s economy recovering after the pandemic. Today low interest rates give an opportunity to companies to get additional finance with a low price to finance operations or invest in long-term projects and Alcoa actively uses debt to finance business activity. Currently, Alcoa’s debt-to-equity ratio and interest coverage are 0.77 and 2.93 which is worse than 83% and 90% of companies in the Metals and Mining industry, respectively. Such amount of debt is a source for additional risk for current operations and could significantly restrict attracting more debt with an acceptable interest for future investment projects.

AA Stock Forecast – DCF Aims at $46 Target

The DCF analysis shows that AA’s target stock price should be around $46. This expected share price makes some $19 upside from the price on March 16^th. The below forecast is based on average data from previous years, the direction of the company’s policy, the company management forward outlooks, and macroeconomic expectations in the main company segments.

I calculated the DCF model for the first forecast period of 2021 based on information from the company’s current reports and management expectations about the amount of production by segments for third-party shipment. Revenue growth for the period 2022 – 2025 was calculated as expected growth by segments (Aluminum, Alumina, Bauxite)  to take into account the shares in the total Alcoa’s return. Before reorganization, Alcoa’s effective tax rate was 45% in 2018. I have assumed that the effective tax rate will be 45%. Also, the company estimated the net deferred tax assets at $2,127 mln. I assumed the risk-free rate and risk premium are equal to 1.84% and 5.6%, respectively. The coefficient of regression (Beta) was calculated by five years monthly logarithm return and it is equal to 2.82 with the 95% confidence interval ranging from 1.96 to 3.67. I made a sensitivity analysis of AA based on WACC and g. Values of WACC 10.09% and 16.96% that correspond with values of Beta 1.96 and 3.67 respectively.

Is DCF Consistent With the Current Market Trend?

Below I conduct Technical analysis the dynamic of Alcoa’s stock

As we can see in the chart, currently AA’s stock price is on an uptrend and it is higher than all three moving averages (the green line is MA-50; the yellow line is MA-100 and the red line is MA-200). However, if we look closely at the current dynamic of OBV, Bollinger, and Stochastic, we could get some price correction in the near future. However, there is not a signal now that after correction tendency will change from an uptrend to a downtrend. The low level of volume, which matches the last three candles, also confirms this statement.

Conclusion

I take a buy-side on AA stock because the stock holds a positive DCF forecast resulting in a $46 target price, i.e. around 56% upside potential in the coming years. Currently, the company is realizing a strategy to achieve sustainable profitability and decrease costs. The company has a strong brand portfolio and can generate a strong amount of free cash flow even in the pandemic time.

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the AA stock forecast. The light green for the short-term forecasts is mildly bullish, while the darker green is a strong bullish signal for the one-year forecast.

Past Success With AA Stock Forecast

I Know First has been bullish on the AA stock forecast in the past. On February 28^th, 2021 the I Know First algorithm issued a forecast for AA stock price and recommended AA as one of the best consumer stocks to buy. The AI-driven AA stock prediction was successful on a 14-days’ time horizon resulting in more than 28.35%.

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Please note-for trading decisions use the most recent forecast.