Alcoa's 60% crash raises urgent questions about its future
- Alcoa's stock price has dropped nearly 60% since March 2022.
- The company faces challenges from reduced EBITDA and declining revenues, alongside increased production costs.
- Despite current challenges, potential recovery is anticipated due to rising aluminum prices and strategic acquisitions.
In recent months, Alcoa has faced significant challenges that have adversely impacted its stock performance. The company, a major player in aluminum production, has seen its stock price fall nearly 60% from its peak of $92 in March 2022. During the same period, the S&P 500 index recorded a 33% increase, highlighting the stark contrast in performance. The decline in stock price is attributed to a combination of factors, primarily a decrease in earning performance reflected in the company's EBITDA, which drastically dropped from $2.2 billion in 2022 to $0.5 billion in 2023. Additionally, revenues fell by approximately 15%, influenced by lower average realized prices for aluminum and alumina as well as increasing production costs in the Alumina segment. A significant contributing factor to these developments is the fluctuation in global aluminum prices, particularly stemming from diminished demand in China. As one of the world's largest consumers of aluminum, a slowdown in China's industrial activities has cascading effects on global pricing. Although there have been signs of demand recovery, the lingering impact of COVID-19 restrictions and the evolving priorities of industries continued to suppress any substantial rebound in prices. Notably, the energy-intensive nature of aluminum production has also been affected by volatile natural gas and electricity prices, which were exacerbated by geopolitical tensions like the Russia-Ukraine conflict. Despite these challenges, there are indicators suggesting potential recovery for Alcoa. The company reported a sequential increase of 3% in aluminum production, reaching 559,000 metric tons, and its net income has grown from $30 million in the previous quarter to $135 million in Q3 2024. This is accompanied by an increase in earnings per share from $0.16 in Q2 2024 to $0.57 in Q3 2024. Furthermore, Alcoa's strategic acquisition of Alumina Ltd. on August 1 has expanded its economic footprint in the alumina market, significantly increasing its third-party sales from 2 million metric tonnes to around 6 million metric tonnes. With expected cash tax savings of approximately $100 million over the next 12 to 18 months due to the consolidation of their tax structures, Alcoa is positioning itself for a potential comeback. Looking forward, aluminum remains a crucial material across various industries, including automotive, aerospace, construction, packaging, and increasingly in renewable energy. The global shift towards greener technologies suggests that demand for aluminum could rise as economies become more focused on sustainable practices. Alcoa's robust balance sheet and its operational base primarily in the U.S. provide it with a competitive edge, particularly in terms of lower energy costs compared to its European competitors. Based on these analyses, there is a positive outlook for Alcoa, with a valuation of approximately $46 per share projected, which reflects a potential appreciation of 25% over its current market price.