Shares of the aluminum giant Alcoa (AA) have been one of the bright spots in the materials sector, rising more than 60% over the past six months, including 24% over the past thirty days. Already up 4% year to date, besting the 2% decline in the S&P 500 index, Alcoa has a lot to prove in 2022.
The company is set to report fourth quarter fiscal 2021 earnings results after the closing bell Wednesday. The rise in metal stocks have been driven by optimism surrounding infrastructure spending aimed at repairing the country’s airports, roads and bridges, among other projects. How much of that money will come to Alcoa? Aluminum is used in a broad range of industrial and consumer end markets. And the commodity is enjoying a strong run as the global economy swings back into motion.
As a result, Alcoa last quarter posted its tenth consecutive quarterly profit beat, thanks to improving aluminum business. Q3 revenue rose 31% year over year to $3.11 billion, beating expectations by almost $200 million. Aside from Alcoa’s own strong operational performance, the company is being rewarded for an improved balance sheet and its overall financial position which included a focus on scaling the alumina and aluminum production segment. Analysts at Jefferies recently reiterated a Buy rating on the stock and raise their price target to $75, reflecting 22% premium from current levels.
Citing, among other things, high aluminum prices and better than expected free cash flow and capital returns, Jefferies urged investors to "stay long and buy more on a dip." Meanwhile, Deutsche Bank cited what it believes to be a high valuation and downgraded the shares to Hold from Buy. While there appears to be support for higher aluminum prices, the company on Wednesday must speak positively about the demand/supply outlook for the next several quarters to keep Alcoa stock in high demand as it has been.
For the quarter that ended December, Wall Street expects the New York-based company to earn $1.89 per share on revenue of $3.33 billion. This compares to the year-ago quarter when earnings came to 26 cents per share on revenue of $2.39 billion. For the full year, earnings are projected to be $6.28 per share, up from a loss of $1.16 a year ago, while full-year revenue of $12.24 billion would rise 32% year over year.
For Alcoa, the quarterly and yearly upbeat revenue and profit forecasts are impressive when considering where these estimates were at the height of the pandemic as the company dealt with oversupply conditions which has been the result of lowered demand and suspending operations. Analyst at Morgan Stanley believes that mining stocks are cheap despite their strong two-year performance. Morgan Stanley expects year-end 2022 for global investment to reach 121% of pre-recession levels, topping its decade average.
These estimates have begun to bear fruit for Alcoa which in the third quarter, beat on both the top and bottom lines. Q3 revenue rose 31.5% year over year to $3.11 billion, beating expectations by almost $200 million, while Q3 adjusted EPS of $2.05 beat by 25 cents. Just as impressive, Q3 adjusted EBITDA totaled $728 million, topping the year-ago total of $284 million and above analysts estimates of $697 million.
With a cash balance of $1.45 billion with no substantial debt maturities for five years, Alcoa has tons of firepower with which to maneuver from a capital return perspective. Until there is clear signs of business deterioration Alcoa stock will continue to shine.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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