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Alcoa Stock: 31.50% Yield Potential with Aluminum Market Recovery

Company Name: Alcoa Inc
Ticker: AA.US
Entry Price: $19.00
Target Price: $25.00
Projected Yield: 31.50%
Time Line: 3 to 6 months
Risk: High

About Alcoa Inc

Alcoa is a US metallurgy company and the second largest aluminum producer in the world. In addition to the production of primary aluminum, it is one of the world leaders in extraction of bauxite and the production of alumina.

What's the Idea?

Capitalize on a stock that may rise with the recovery in the aluminum market, strong financial performance, and being undervalued.

Buy Alcoa Inc Shares >>

Why Alcoa Inc? 

Reason 1: Price Fall due to Wary Outlook for Q1 2021

Since early this year, Alcoa stock lost 26% compared to its local high, as the management gave a weak outlook for Q1 2021. With the rising costs, low bauxite prices, and negative currency revaluation, it may be hard for the stock to perform well.

Despite this negative outlook, however, there are a few drivers that may help the price climb in the short term.

Reason 2: Aluminum Market Recovery

Roy Harvey, Alcoa's CEO, says global aluminum consumption in 2021 may rise by 7% compared to last year, thus reaching 67M tons and marking the highest growth since 2014. Miles Prosser, who is Secretary General of the International Aluminum Institute (IAI), also highlighted that the IAI expects the aluminum consumption to increase by 6% in 2021. In particular, a rise by 5% is expected in China, while the rest of the world will get +10% thanks to the recovery growth.

The core driver of such a recovery might be the global economy recovering as well after last year's recession due to the COVID crisis. The stimuli adopted by many governments should play their part, too. Alcoa expects the demand for aluminum to specially rise in infrastructure construction, power grids, packaging, mechanical engineering, automotive industry, and electric vehicles. The recovery in the aircraft and space sectors may also boost the growth.

Currently, the stimulus programs and policies adopted by governments help boost both the global economy and the stock markets, as well as the commodities market. During 2020, aluminum price rose by 13.30%, which is rather mediocre compared to other metals, as gold, silver, nickel, palladium, copper, and platinum rose from 25% to 52.70% within the same year. If the stimuli are still in place, both aluminum and alumina will continue rising.

With a positive near-term outlook for the aluminum market, Alcoa stock may well rise, in the midterm, too.

Reason 3: Selling Non-Core Assets and Gaining Liquidity

Alcoa removed non-core assets from the company's balance sheet through their sale, which should help it to raise from $500M to $1B in cash. The non-targeted assets included Contingent Gum Springs, Warrick Rolling Mill, and Gum Springs. Gum Springs, a waste recycling company, was sold at $200M, while the additional $50M will be paid under certain conditions.

In late November Alcoa announced its agreement to sell Warrick Rolling Mill with Kaiser Aluminum. The deal amounts to $670M, Alcoa getting $587M in cash and $83M as a post retirement employee benefit (OPEB) obligation). The deal is expected to be over in Q1 2021. If all those deals are successful, the company will have both higher liquidity and better balance sheet.

Reason 4: Improved Financial Results

In 2020, Alcoa did face some challenges, as the earnings decreased by 11%, adjusted EBITDA went down by 30%, and the EPS fell from -$0.99 to -$1.16. However, starting the second six months of 2020, it started getting better. In Q4, the earnings already rose 1.10%, and adjusted EBITDA made it to increase by 4% compared to the same period in 2019. The EPS, meanwhile, reached $0.26 versus $1.17 a year before.

Alcoa has a moderate level of debt burden, the size of loans and liabilities on pensions/OPEB being $4.88B. Last year, the company successfully issued a $750M bond with a 5.50% coupon until 2027. This helped it to boost liquidity, as the amount of cash reached $1.60B in late 2020. Net Debt/EBITDA is currently 3x, which is acceptable, while the management also expects to reduce the level of net debt to $2B or at least $2.40B within one to three years.

During last year, the operating cash flow was at $394M, while FCF amounted to -$142m. At the same time, the company has no liquidity issues.

Alcoa's EV/Sales and EV/EBITDA ratios are currently 0.70x and 6.00x, respectively, which is below the industry average. Thus, in case the aluminum market continues rising and the company's financial position improves, the stock price may increase, too. The stock is very volatile at the moment, though, which means there might be some additional risks involved.

How to Use the Idea?

  1. Buy Alcoa Inc shares at $19.00. 
  2. Allocate no more than 2% of your portfolio amount. To build a balanced portfolio, you can use recommendations by our analysts. 
  3. Sell the stock when the price is at $25.00 per share.

How to Buy Alcoa Inc Shares? 

If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.

After opening an account, you can buy shares in either of the following ways:

Freedom24 Web PlatformGo to the Web Terminal section, type AA.US (Alcoa Inc. ticker in the NYSE) in the search box, and select Alcoa Inc in the search results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.

Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type AA.US (Alcoa Inc ticker in the NYSE) and select Alcoa Inc. in the results. You will then see the stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.

Buy Alcoa Inc stock to capitalize on the aluminum market recovery!

Buy Alcoa Inc Shares >>

*Additional information is available upon request. Investment in securities and other financial instruments always involves risks of capital loss. The Client should make himself aware at his own accord, including to familiarize himself with Risk Disclosure Notice. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Commissions, fees or other charges can diminish financial returns. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and do not constitute an investment advice service. The recipient of this report must make their own independent decisions regarding any securities or financial instruments mentioned herein. Information has been obtained from sources believed to be reliable by Freedom Finance Cyprus Ltd or its affiliates and/or subsidiaries (collectively Freedom Finance). Freedom Finance do not warrant its completeness or accuracy except with respect to any disclosures relative to the Freedom Finance and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated.