According to consensus estimates compiled by Thomson Reuters, Alcoa (AA) has a mean one-year price target of $32. It represents a 7.7% upside over the closing prices on December 23. Of the ten analysts surveyed by Thomson Reuters, four rate Alcoa stock a “buy,” while two analysts rated it a “sell.” The remaining four analysts see Alcoa as a “hold” after the recent run-up.
In contrast, Century Aluminum (CENX) received a “hold” rating from all five analysts surveyed by Thomson Reuters. The company carries a mean one-year price target of $7.8. It represents 15.2% downside over the closing prices on December 23.
Wall Street analysts had mainly been sitting on the sidelines prior to Alcoa’s split. We did see some customary target price updates after the earnings release, but analysts’ actions could be termed “muted” at best. The markets (DIA) played a wait-and-see game before Alcoa’s split.
After the split, commodity prices became Alcoa’s key driver. We should note that aluminum producers’ earnings such as Rio Tinto (RIO), Century Aluminum (CENX), and Norsk Hydro (NHYDY) are sensitive to aluminum prices. Alcoa expects its annual EBITDA (earnings before interest, tax, depreciation, and amortization) to rise by $233 million for every $100 per metric ton rise in aluminum prices. The EBITDA is expected to fall by $233 million for every $100 per metric ton fall in aluminum prices. Similarly, Alcoa’s annual EBITDA is expected to rise or fall by $63 million for every $10 per metric ton rise or fall in alumina prices.
In the next part, we’ll analyze the bullish argument for Alcoa.