Alcoa (AA) carries a mean consensus price target of $58.3, which represents a 42.7% upside over its October 1 closing price. Alcoa has received a “strong buy” rating from three analysts, while eight analysts rate it as a “buy.” The remaining four analysts polled by Thomson Reuters on October 1 rate Alcoa as a “hold” or some equivalent.
Last month, Berenberg initiated coverage on Alcoa with a “buy” rating and a $54 price target. The brokerage also initiated coverage on Century Aluminum (CENX) with a “sell” rating. Towards the end of the month, Credit Suisse lowered Alcoa’s price target from $65 to $58. However, the brokerage maintained its “overweight” rating on the stock. To be sure, analysts have been generally bullish on Alcoa. The stock trades at a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) of 3.3x its 2018 expected EBITDA and 3.6x its 2019 consensus EBITDA. The estimates are based on consensus EBITDA of $3.1 billion this year and $2.9 billion next year.
To be sure, valuing metal and mining stocks can be a tricky exercise given the volatility in commodity prices. Alcoa’s earnings estimates could change dramatically if the outlook for aluminum prices improves. At the beginning of the year, aluminum (RIO) was expected to continue its good run in 2018 as well. However, the US-China trade spat changed the equation for base metals, and aluminum was no exception. Having said that, aluminum’s woes are not solely limited to the trade war, which we’ll explore in the next article.