Why Has Alcoa’s Stock Price Risen by 18% In The Past One Month?

December 22nd, 2017 by Trefis Team
-4.13%
Downside
36.06
Market
34.57
Trefis
AA: Alcoa logo
AA
Alcoa

Alcoa‘s (NYSE:AA) stock price has rallied by roughly 18% over the past one month after a fall in its price was observed during November. The recent spike in Alcoa’s stock price is driven mainly by an improved analyst outlook on Alcoa which, in turn,  has increased the shareholders confidence on the stock.

In this article we shall be discussing the factors which are driving Alcoa’s price rally.

(Source: NASDAQ)

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Expected Stringent Supply Side Policies

Although China’s winter aluminum output cuts have not been as severe as expected, stringent action on production cuts are expected in the first quarter of the upcoming year which would put pressure on the global aluminum supply. The Chinese government is expected to initiate several rounds of inspection on its industrial activity starting in January, which would help in ensuring that production levels are well within the guidelines initially planned.

Additionally, China’s pollution control policies are discouraging aluminum producers in constructing new smelters within the country. This limits the potential of increased supply of aluminum in the near future and hence creates an upward pressure on aluminum prices.

Alumina & Bauxite Production Cuts

China’s industrial cuts are extended on alumina and bauxite production as well, which has created a supply shortage of these products to produce aluminum. This would continue to support aluminum prices in the upcoming years.

Alcoa, being a major producer of alumina, supplies close to 68% of its production volumes to third parties. [1] A global shortage of alumina, would enable the company to continue to demand higher prices for their products and in turn result in higher revenues from this business segment.

Alcoa Likely to Initiate Dividend Payments Starting Next Year

An analyst at Morgan Stanley expects Alcoa to initiate payment of a dividend starting next year, given its strong cash flow position. [2] The company currently has a dividend yield of 0% and thus an increased likelihood of a dividend distribution in the near future has made the stock attractive to  investors.

Hence, given the above upside on the company’s fundamentals, investors have gained more confidence in the stock and thus has led to a rally in the company’s stock price.

We have a $42 price estimate for Alcoa which is currently below the market.

Have more questions about Alcoa? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Alcoa

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Notes:
  1. 3rd Quarter Earnings, Alcoa Quarterly Results [↩]
  2. 6 Reasons Alcoa Can Fly, Barrons [↩]