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After losing almost 50% of its value over the past twelve months, Alcoa’s (AA) cyclical commodity business has certainly taken its toll on investor sentiment. But it is now beyond time to give this aluminum giant another look.
The company is set to report first quarter fiscal 2019 earnings results after the closing bell Wednesday. Although Alcoa, for that matter much the SPDR S&P Metals & Mining ETF (XME), is highly sensitive to alumina prices, Alcoa’s balance sheet and overall financial position remains solid. Specifically, from a cash flow standpoint, the company looks undervalued, regardless of how broken its 1-year chart might appear.
As for the company’s recent struggles, the overall decline in metal stocks have been driven by the US-China trade war that has sliced into demand, given that China is world’s largest consumer of metals. This is partly why Alcoa is the expected on Wednesday to deliver year-over-year decline in earnings on lower revenues. The good news is, there is now more optimism that the trade war might soon end.
For the quarter that ended March, Wall Street expects the New York-based company to lose 11 cents per share on revenue of $2.81 billion. This compares to the year-ago quarter when earning were 77 cents per share on $3.09 billion in revenue. For the full year, ending in December, earnings are projected to decline 57% year over year to $1.51 per share, while full-year revenue of $11.56 billion would decline 13.7% year over year.
The quarterly and yearly downbeat forecasts do not immediately inspire confidence. And much of this has been due to oversupply conditions which has been the result of lowered demand from China. As such, Alcoa projects global surplus for its Alumina segment, which is expected to see a decline in shipments in 2019. The fact that the top- and bottom-line numbers are expected to see significant declines is not a surprise.
Analysts have scaled back expectations citing the issues I’ve highlighted above. Earlier this month, Bank of America analyst Timna Tanners downgrade Alcoa from Buy to Neutral and lowered the price target from $45 to $31. Deutsche Bank analysts, however, disagreed. Citing improved Chinese demand and supply-demand dynamics specific to aluminum, Deutsche Bank initiated coverage on Alcoa with a Buy rating.
Nevertheless, the management must project some level of confidence in terms of how they believe the underlying business will perform in 2019. The stock has an average analyst 12-month price target of $37.50, which suggests a 35% upside from current levels. As such, patience is still the best way to play Alcoa stock for 2019.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
