Alcoa’s Stock Drops 65% In 2020; Is It Still Unattractive?

After almost a 65% decline in Alcoa’s (NYSE: AA) stock price since the beginning of this year, at the current price of $8 per share, we believe Alcoa’s stock is likely to remain around the current level considering the impact of the ongoing coronavirus crisis. The stock is down 86% compared to where it was at the end of 2017, a little over 2 years ago. Our dashboard What Factors Drove -86% Change In Alcoa Stock Price Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

The stock price declined by over 60% from $53.87 at the end of 2017 to $21.51 at the end of 2019. This is justified by the 10.5% decrease in Alcoa’s revenues, which was exacerbated by a whopping 550% decline in net income margin, which declined from 2.4% in 2017 to -10.8% in 2019. Due to a sharp drop in net income, EPS crashed from $1.51/share in 2017 to -$6.07/share in 2019, as the number of shares outstanding remained almost stable. Due to loss reported by the company in 2019, Alcoa’s P/E multiple was negative (which does not hold any significance).

Thus, lower revenue and margins have led to a sharp drop in stock price from 2017 to 2019. Revenue decline was led by lower volume sold and decline in price realization. Alumina has been in excess supply from December 2018, which has, in turn, led to a drop in global price levels. Additionally, with an increasing number of aluminum players cutting down on capacity, demand for alumina was lower in 2019. Though aluminum was in deficit in 2019, this is not reflecting in pricing due to a continuous rise in Chinese aluminum exports, which have led to a decline in global price levels. As increasing number of steel players are shedding capacity, and demand from automobiles being modest, China has increased its exports of semi products at a lower price, which has, in turn, led to a decline in primary aluminum products worldwide. Also the new operating model under which Alcoa has put 1.5 million metric tons of aluminum smelting capacity under review has led to a drop in stock price in anticipation of lower revenue in the coming years. Profitability deteriorated sharply during this period due to higher restructuring charges related to Spanish operations and higher cost per ton due to a drop in production.

However, the further drop of 65% in stock price in 2020 was mainly due to the impact of the coronavirus crisis, which we explain below.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. The aluminum demand from industry players affects global aluminum price levels, in turn impacting the company’s price realization for its products. Lower demand from construction and automobile players, has led to a drop in global aluminum prices recently. Additionally, with the outbreak and spread of coronavirus expected to lead to further slowdown in economic activity and demand, aluminum prices are expected to remain under pressure in the near term. We believe Alcoa’s Q1 results will confirm the hit to its revenue. It is also likely to accompany a lower Q2 and lower 2020 guidance.

Alcoa’s stock is down by about 46% since January 31 after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 15%. Thus, Alcoa’s stock has performed worse than the broader market during this crisis so far. If there are signs of containment of the virus around the Q1 earnings announcement, there is a possibility of a healthy upside for the stock. On the contrary, in the absence of any clear signs of virus containment by the end of April, the stock could hover around its current level of $7-$9 per share.

View our dashboard analysis Coronavirus Trends Across Countries, And What It Means For The U.S. for the current rate of coronavirus spread in the U.S. and forecasts on where it could be headed, based on comparison with other countries. Our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a more complete macro picture of historic crashes and how the sell-off during early March compares.

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