After its split, Alcoa (AA) is now a pure-play aluminum producer. That makes the company’s fortunes closely tied to commodity prices; in particular, aluminum and alumina prices. Recently, both these commodities have shown weakness. Alumina prices have pared down their 2017 gains and are currently quoted at year-to-date losses. Aluminum is also off its 2017 highs. In this part of the series, we’ll see how analysts are rating Alcoa stock amid weak commodity prices.
According to consensus estimates compiled by Thomson Reuters, on June 19, 2017, ten of the 13 analysts covering Alcoa gave the stock a “buy” or equivalent rating. The remaining three analysts gave it a “hold,” and none of them gave it a “sell.”
Based on its June 19, 2017, closing price, Alcoa’s consensus price target implies an upside of 38.3%. In contrast, Century Aluminum (CENX) is trading 2.0% below its consensus price target. Norsk Hydro’s (NHYDY) target price implies a potential upside of 20.4%.
Are analysts too optimistic?
The consensus view has been bullish on Alcoa since its split. Alcoa’s manageable debt ratios coupled with a general sense of optimism in the aluminum markets could be the key drivers behind this. However, aluminum market sentiments have faded somewhat over the last month. Rising Chinese aluminum exports amid a slowdown in domestic growth rates and rising production have put pressure on aluminum prices (XLB) (SOUHY).
Although the market seems to be factoring in most new-term headwinds, we could see some analysts lower Alcoa’s target price after its 2Q17 earnings release, especially if aluminum prices fall more.
In the next part, we’ll see what analysts are projecting for Alcoa’s 2Q17 earnings.