Alcoa’s Stock Struggles While Aluminum Prices Decline

Alcoa (NYSE:AA) has lost nearly 60% since hitting a high of $92 in March 2022, in stark contrast to the 33% rise in the S&P 500 during the same period. The decline in Alcoa’s stock is more pronounced than that of its competitors, such as Century Aluminum Co (NASDAQ:CENX), which is down 33%, and Kaiser Aluminum Corp (NASDAQ:KALU), down 28%. Alcoa is a major player in producing aluminum products and alumina. The gradual sell-off is attributed to various macroeconomic factors that have curtailed the post-COVID-19 aluminum price surge. Presently, aluminum prices have dropped from around $4,000 per metric ton in March 2022 to about $2,580.

The decline is in part due to strict COVID-19 lockdowns in China that affected its manufacturing and construction sectors. As one of the world’s largest consumers of aluminum, decreased demand from China had significant repercussions on global prices. Although demand has started to recover, the long-lasting impacts of the pandemic and changing industrial priorities are slowing the process. Moreover, aluminum production is energy-intensive, and energy prices — particularly natural gas and electricity — have seen fluctuations due to geopolitical events like the Russia-Ukraine conflict. For those seeking a more stable investment with solid returns, consider the High Quality portfolio, which has outperformed the S&P 500 with returns exceeding 91% since inception.

Factors Behind Alcoa’s Earnings Drop

The last couple of years has seen Alcoa’s earnings shrink, reflected in a drop in EBITDA from $2.2 billion in 2022 to just $0.5 billion in 2023. Revenues have decreased by approximately 15% from 2022 to 2023. This underperformance mainly comes from lower average realized prices for aluminum and alumina and increased production costs, especially within the Alumina segment.

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Given today’s uncertain macroeconomic climate surrounded by rate cuts and multiple conflicts, will AA repeat its underperformance from 2022, 2023, and 2024 over the next year — or can we expect a turnaround?

Future Expectations for Alcoa’s Stock

We hold a positive outlook for Alcoa stock, driven by rising alumina prices, increasing aluminum production, and strategic acquisitions. Aluminum production has risen for eight consecutive quarters since the fourth quarter of 2022, with a 3% sequential increase to 559,000 metric tons. High alumina prices, combined with low raw material costs, have significantly boosted EBITDA, and we anticipate this to continue in the next quarters. Net income climbed from $30 million in the previous quarter to $135 million in Q3 of 2024, while earnings per share rose from $0.16 in Q2 2024 to $0.57 in Q3 2024. Alcoa’s acquisition of Alumina Ltd. on August 1 has enhanced its presence in the alumina market, increasing third-party sales from 2 million to approximately 6 million metric tons. This consolidation is expected to yield about $100 million in cash tax savings over the next 12 to 18 months.

Aluminum is vital in various industries including automotive, aerospace, construction, packaging, and renewable energy. As the global shift towards greener technologies continues, aluminum demand is likely to rise. With a solid balance sheet and production facilities predominantly in the U.S., where energy costs are lower compared to European competitors, Alcoa seems well-positioned. The company is also focused on improving operational efficiency, cutting costs, and prioritizing high-margin products.

Alcoa’s dedication to enhancing sustainability through reduced carbon emissions and investments in green technology may better long-term profitability as demand for sustainable products increases. We value AA stock at around $46 per share, suggesting a potential upside of approximately 25% from its current market price. For further insights on Alcoa’s valuation, check our comprehensive analysis. Alcoa valuation.

[1] Returns as of 1/2/2025
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.