After Releasing Their Q4 Earnings, is Alcoa a Buy?

Headquartered in  Pittsburgh, Pa., Alcoa Corporation (AA) is a leading aluminum, alumina, and bauxite producer. With more than 135 years of experience, AA is the second-largest aluminum producer in the United States by revenue. The company has also been recognized for its environmental, social, and governance (ESG) performance. It was recognized for its ESG leadership by the Dow Jones Sustainability Indices in 2021. In addition, AA has an ISS Governance QualityScore of 1, indicating low governance risk. Regarding this, AA Executive Vice President Sonya Elam Harden said, “Sustainability is embedded in Alcoa’s strategic priorities, and our consistent listing in the DJSI underscores this steadfast commitment…Looking ahead, we’re continuing to advance our efforts in alignment with our vision to reinvent the aluminum industry for a sustainable future.”

AA released its fiscal 2021 fourth quarter (ended December 31, 2021) and full-year earnings report on January 19, after the market closed. AA’s revenues increased 39.6% year-over-year to $3.34 billion, surpassing the $3.29 billion FactSet consensus revenue estimate. Its adjusted EPS came in at $2.50, reflecting an 861.5% rise from the same period last year. And it surpassed the Street’s EPS $1.63 estimate by 53.4%. However, the company’s net loss widened 9,700% from its year-ago value to $392 million. This can be attributed to losses from restructuring-related charges, non-cash pension settlement charges, and the closure and curtailment of two aluminum smelters.

AA shares have declined 6.5% in price since January 20 to close Friday’s trading session at $56.21. However, the stock has gained 189.7% over the past year, outperforming the benchmark S&P 500 index’s 16.7% returns over this period.

Here is what could shape AA’s performance in the near term:

Business Restructuring

Over the past few months, AA has been restructuring its operations to focus on its core business by selling certain industrial assets. Last November, the company sold its land and industrial assets to the state of Texas for $240 million.

AA closed its 146,000-ton aluminum smelting capacity at Wenatchee Works in Washington last December. However, this closure is expected to result in cash outlays of $10 million in 2022 and approximately $60 million over the next seven years.

Also, on Dec. 30, 2021, AA announced plans to curtail production at its San Ciprián aluminum plant in Spain to resolve ongoing challenges. The company expects to record $60 million in restructuring-related charges due to this temporary closure. Furthermore, the plant is expected to record an annual net loss (before taxes) in the range of $20 - $25 million in 2022. AA plans to reopen this plant in 2024 and expects to incur $35 million in restart costs.

Mixed Growth Prospects

Analysts expect AA’s revenues to increase 13.9% in its fiscal year 2022 first quarter (ending March 2022), 13.6% in the second quarter, and 4.8% in fiscal 2022. However, the company’s revenue growth rate is expected to slow next year, as consensus revenue estimates for fiscal 2023 indicate a 0.8% improvement year-over-year.

The Street expects AA’s EPS to rise 197% in the current quarter, 20.1% in the next quarter, 9% in the current year. However, the company’s annual EPS is expected to decline 3.2% in fiscal 2023.

Consensus Rating and Price Target Indicate Potential Upside

Of  12 Wall Street analysts that rated the stock, nine rated it Buy while three rated it Hold. The 12-month median price target of $67.75 indicates a 20.5% potential upside from Friday’s $56.21 closing price. The price targets range from a low of $55.00 to a high of $78.00.

POWR Ratings Reflect Uncertainty

AA has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

AA has a C grade for Sentiment and Value. Its mixed growth prospects justify the Sentiment grade. In addition, the stock’s 7.68 forward non-GAAP P/E multiple is 49.7% lower than the 15.27 industry average. However, its 4.46 trailing-12-month Price/Book ratio is 108.4% higher than the 2.14 industry average, which is in sync with the Value grade.

Of the six stocks in the C-rated Aluminum industry, AA is ranked #3.

In addition to the grades I have highlighted above, view AA ratings for Growth, Momentum, Stability, and Quality here.

Bottom Line

As one of the biggest aluminum companies in the U.S. and globally, AA has benefited from the resumption of industrial and manufacturing activities since late 2020. However, the company’s depressed bottom line is a cause for concern. While AA’s restructuring plans are expected to streamline its operations and minimize costs eventually, its financials are expected to be adversely affected in the following quarters due to hefty restructuring-related charges. Thus, we think investors should wait until AA’s operations stabilize before investing in the stock.

How Does Alcoa Corporation (AA) Stack Up Against its Peers?

While AA has a C rating in our proprietary rating system, one might want to consider looking at its industry peers, Constellium SE (CSTM) and Aluminum Corporation of China Limited (ACH), which have a B (Buy) rating.

AA shares fell $2.01 (-3.58%) in premarket trading Monday. Year-to-date, AA has declined -9.53%, versus a -8.59% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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