Have the Markets Been a Little Unfair to Alcoa This Year?


Alcoa (AA) closed at $10.32 on August 22, gaining 0.49% from its previous day’s closing price. It’s been a lackluster year for Alcoa’s investors, as the stock is up only ~4.5% year-to-date (or YTD).

However, 2016 has been a decent year so far for aluminum producers. Century Aluminum (CENX) has led the pack with a 68% YTD return, and Norsk Hydro (NHYDY) has gained 15.1% so far in 2016.

Have the Markets Been a Little Unfair to Alcoa This Year?

One may argue that we have not chosen the correct comp set, as Alcoa is not a pure-play commodity producer like the other companies listed above. There definitely is merit to this argument, as the value-added business brings more revenue and profits to Alcoa than the commodity business.

However, Alcoa’s earnings are still sensitive to aluminum prices. Aluminum prices have been strong this year and recently touched their one-year high. However, even these elevated aluminum prices failed to bring any major buying support to Alcoa.

Downstream comps

In 2Q16, the value-added business, which will be split into Arconic later this year, accounted for more than 61% of Alcoa’s consolidated 2Q16 EBITDA.[1. earnings before interest, tax, depreciation, and amortization]

However, Alcoa has underperformed most of its comps in the Downstream business, as we show in the graph above. Constellium (CSTM) has been the worst performer among Alcoa’s downstream comps.

Series overview

Has the Market (SPY) been a bit unfair to Alcoa this year, or is the stock’s underperformance justified by its underlying fundamentals? To answer this question, we’ll have to look at different fundamental factors throughout this series.

Before that, however, let’s explore how Wall Street is currently rating Alcoa.