Falling Aluminum Prices Will Weigh On Alcoa’s Q3 Results

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Alcoa (NYSE:AA) is expected to report its Q3 2022 earnings on Wednesday, October 19, reporting on a quarter that saw aluminum prices continue to face considerable pressure. We expect the company’s revenues to come in at about $2.95 billion, roughly in line with the consensus estimates, although this would mark a sequential decline of about 19% and a year-over-year decline of roughly 5%. We estimate that earnings will stand at about $0.15 per share, slightly ahead of the consensus, although this would mark a decline from levels of around $3 per share over the last quarter. So what are some of the trends that are likely to drive Alcoa’s results? See our interactive dashboard analysis on Alcoa Earnings Preview for more details on how AA’s revenues and earnings are likely to trend for the quarter.

Aluminum prices have seen a considerable decline in recent months,  falling from a high of about $3,800 per metric ton in March 2022 following the start of Russia’s invasion of Ukraine to levels of around $2,500 as of early July. Prices of the metal fell close to $2,200 as of the end of September. There are mounting concerns about the global economy as a steady increase in interest rates by Central banks is expected to impact global growth and demand for industrial commodities such as aluminum. Moreover, aluminum output from China has also risen as new capacity comes online after delays and production cuts seen over 2021. This is likely to put some pressure on Alcoa’s price realizations. Moreover, Alcoa’s profitability is likely to be impacted by rising energy prices and higher input costs.

However, we still remain positive on AA stock. Consensus estimates point to earnings of about $6.50 per share for the full year, meaning that the stock trades at just about 6x forward earnings at the current market price of about $38 per share. Although cyclical stocks typically see lower multiples when the markets project that earnings and revenues are peaking, there are a couple of trends that still make Alcoa stock a good value. Alcoa stock has already declined by about 60% from levels seen around March 2022 and remains down almost 37% year-to-date. Moreover, rising investments in the renewable energy sector including electric vehicles, charging infrastructure, and solar & wind power plants remain secular drivers for aluminum demand. We also think that Alcoa has an edge over other aluminum producers given its strong balance sheet (net debt of just about $163 million) and also due to the fact that its facilities are largely based in the U.S., resulting in lower energy costs compared to European rivals who are highly dependent on Russian natural gas.

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 Returns Oct 2022
MTD [1]
2022
YTD [1]
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Total [2]
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[1] Month-to-date and year-to-date as of 10/4/2022
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