Alcoa: Is It Time to Go Long?

Aluminum miner Alcoa (AA) has been in troubled waters over the last 12 months as the stock has lost about 45% of its value in the reference period. The company has struggled due to the falling prices of aluminum and the last quarter was no exception to it as Alcoa reported EPS of $0.07, much less than the analysts’ estimate of $0.14. On the revenue front Alcoa reported sales of $5.60 billion compared to analyst estimate of $5.68 billion.

While Alcoa has struggled in the recent past, I think the company’s worst days are behind it and investors should consider buying it near lows as aluminum prices are expected to move higher in the near future.

One of the major reasons that created problem for Alcoa this year was the oversupply in the aluminum industry, as it has led to feeble pricing.
The root of the oversupply can be credited to China, where economic growth is decelerating more than the expected pace. In reality, as a result of mild economic growth, the company has been mandatory to sleek its auto production growth forecast for this year from 5%-8% to 1%-2%. Altogether, the company has been mandatory to lower the projection for growth in important areas in China, such as commercial buildings and construction and heavy-duty trucks.

Retail car sales dropped in the mid of 2015 and hardly rose in August from the year prior. So far, the car market also grieves from excess supply. In the middle of January 2014 and August 2015, companies manufactured and transported nearly 3% additional cars to suppliers than customers really bought.

Still, there are positives emerging from China that investors should not ignore. At present, China accounts for nearly 56% of worldwide aluminum volume, and the main thing is that smelters in the country are now cutting manufacture in edict to deliver some strength to prices. This is the reason why Alcoa has decreased its aluminum additional estimate for 2015 by 210,000 metric tons.

Conclusion

Alcoa’s value-added business has helped it perform nicely in the course of weak aluminum pricing. With production in China expected to decrease, aluminum prices will get a boost and will finally move in the right direction. The market was plagued by oversupply for the last few years, however things are looking good now. Hence, with aluminum prices expected to increase, I think investors can bet on Alcoa’s recovery. The stock is attractively priced and risk/reward ratio is in Alcoa’s favor, which makes the stock a good speculative buy.

Published on Dec 1, 2015
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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