Buy, Sell, or Hold Alcoa Stock As Aluminum Prices Remain Soft?

AA: Alcoa logo

Alcoa (NYSE:AA) stock has declined by close to 10% over the last month and remains down by close to 24% over the past year. Now, the broader markets have taken a hit in recent weeks, amid concerns about a U.S. recession in 2023.  The Federal Reserve is also continuing with its hawkish stance with plans of further rate hikes, despite the moderating pace of inflation and this is likely to weigh on demand for industrial commodities. Aluminum prices have also declined from around $2,500 per ton in early December to about $2,400 currently and remain well below levels of over $3,000 per ton seen in early 2022. Moreover, aluminum output from China has also been expanding, driven by relaxed power restrictions and new capacity coming online. Over November 2022, China’s primary aluminum production was up by 9.4% year-over-year. While the impact of this on prices is likely to be partly alleviated by China’s move to raise tariffs on aluminum exports, this could be a negative for the aluminum market.

We remain neutral on Alcoa stock, with a $47 price estimate, which is roughly in line with the current market price. Although there could be near-term headwinds for commodities given the uncertain macro environment, we see a couple of positives for aluminum producers such as Alcoa. Energy prices have cooled off a bit in recent weeks, and this could help Alcoa to an extent. 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 in the longer run,  given its strong balance sheet (net debt of just about $370 million), and relatively greener operations with its smelting operations largely running on hydropower. 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.

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Returns Jan 2023
MTD [1]
YTD [1]
Total [2]
 AA Return 0% 0% 63%
 S&P 500 Return 0% 0% 71%
 Trefis Multi-Strategy Portfolio 0% 0% 215%
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  5. Falling Aluminum Prices Will Weigh On Alcoa’s Q3 Results
  6. What’s Happening With Alcoa Stock?

[1] Month-to-date and year-to-date as of 1/2/2023
[2] Cumulative total returns since the end of 2016

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