Despite the sharp sell-off in Alcoa Corp. (NYSE: NYSE:AA) stock since 2022, I think the tide is now turning back in AA's favor. The reason that makes up this catalyst is actually hurting the demand side of the entire aluminum market – that’s especially true for Europe. Rusal – in the past one of the largest aluminum producers and suppliers in the world – is facing major challenges as it loses its position in the EU market due to sanctions. While Rusal struggles, Alcoa could take the initiative into its own hands and take the bulk of the freed-up market for itself.
The fall of the Russian aluminum empire is the key catalyst
In the past more than two years, things have really been shaken up worldwide, especially when it comes to politics and how countries relate to each other. And logically these shifts have had a big impact on the aluminum market. The tension between Russia and Ukraine, in particular, has caused quite a stir.
One big Russian company feeling the heat is Rusal, a major aluminum producer, who’s looking at potentially losing up to 36% of its sales, according to Bloomberg. The recent sanctions have hit the firm hard, making it tough for Rusal to sell as much aluminum as they used to (in fact, the EU market is likely gone for them for an unknown period of time).
It's not just about the money for them: there are real consequences here as Rusal is facing some tough decisions about how to stay afloat with fewer opportunities in the market. They might even have to cut back on production like they did during the financial crisis back in 2008.
Last October, local analysts said that Rusal could shut down two smelters in the European part of Russia (Kandalaksha and Volgograd) and one in Siberia (Novokuznetsk). These smelters have the highest costs in the group and have a total capacity of 500 tons of annual production.
On the other hand, I believe companies like Alcoa should see an opportunity in all this chaos. First off, with metal prices shooting up, they're in a good position to make some serious gains. Plus, Rusal’s loss of the EU market provides its competitors like Alcoa an even bigger edge – the possibility to conquer the broader share of the market in the region.
Looking ahead, it seems like aluminum prices are only going to keep going up. Goldman Sachs is predicting a shortage for at least the next couple of years, which means prices could stay high. And that's not great news for industries that rely on aluminum, like manufacturing – especially in Europe, which was long dependent on Russian relatively cheap and high-quality commodities. Now orders are down, businesses are struggling, and demand for aluminum is weakening there.
But it's not all doom and gloom when we assess the whole situation in global terms. Despite the challenges, Alcoa is holding steady. Their latest financial report shows that they started to turn around in Q4 2023. Despite lower sales, Alcoa's adjusted EBITDA in Q4 surged by 48% QoQ, with the margin rising to 5.1%.
Net loss per share also decreased from -$1.30 to -$0.81. Aluminum shipments are expected to be stable, aligning with 2023 figures but slightly lower than 2022, with consistent production forecasts. In my opinion, they're making smart moves to adapt to the changing market, which is keeping them in the game.
Alcoa may be looking to increase its production even more, taking advantage of the gaps left by companies like Rusal. With their global scale and presence, they're in a prime position to attract customers who are looking for stability in uncertain times, in my opinion. And with less competition now after the sanctions, they're calling the shots when it comes to setting selling prices, which could mean even bigger profits down the line.
The technical analysis suggests that AA stock could still rise by over 7-8% before meeting its 1st major resistance level. The medium-term target is $53-54 per share, suggesting over 45% of potential upside. This assumption is based on the possibility of AA stock staying above the 200-day moving average and the expectation that the RSI indicator will cool down and then rise again.
Risks with investing in Alcoa stock today
Despite all the positive things I wrote above, I do have some concerns. One thing that could potentially hold Alcoa back is the challenges they might face with their joint venture with Alumina (OTC:AWCMY) Limited. Sure, it could give them better control over aluminum production, but getting there involves shelling out a lot of money upfront and dealing with regulatory hoops.
And then there's the issue at their San Ciprian complex. It's not making money right now, and without some help from the government or a break on energy prices, it's causing cash flow headaches. Trying to offload it because of these troubles could mean taking a hit on its value or selling it for less, which wouldn't help Alcoa's financial situation. I think these challenges could drag down the stock in the future.
Another worry is how Alcoa is currently priced. Right now, it's trading at a forward EV/EBITDA ratio of about 9.2x, which is quite a bit higher than usual. So even if we imagine that Alcoa's earnings next year shoot up by 50% more than what everyone's expecting, it'd still only be fairly priced in a really positive scenario, not undervalued. Compared to the rest of the market, Alcoa still looks like an underdog - note the price-to-book ratio of 1.62x, which is about 43% above average. At the same time, Alcoa's margins are well behind industry norms, according to Investing.com data.
Conclusion
To summarize, I think the sanctions on Rusal could really shake up the supply chain, opening doors for Alcoa to grab a bigger slice of the market. With the recent sanctions causing a stir in the aluminum market, especially in Europe, there might be a bit of a hit in demand. But overall, it seems like global demand for aluminum is holding pretty steady. And with the way things are going, it looks like aluminum prices will keep climbing, which should be good news for Alcoa as long as they stick to their production plans.
That said, there are some big risks to consider, like the high operational hurdles and the hefty numbers like EV/EBITDA. Alcoa's earnings would need to really outpace what most people are expecting, which I'm not totally sold on just yet. But it's clear that Alcoa has more potential for growth now than it did before.