JPMorgan has updated its stance on Alcoa Corp (NYSE: NYSE:AA), raising the price target to $39.00 from the previous $36.00, while maintaining a Neutral rating on the shares.
Alcoa's third-quarter performance exceeded expectations with an adjusted EBITDA of $455 million, marking a 40% increase quarter-over-quarter, and surpassing the consensus estimate of $390 million.
The significant improvement in earnings was attributed to higher alumina pricing and favorable costs for raw materials and energy, which provided a combined tailwind of $144 million. This was partially offset by a $45 million headwind from lower aluminum prices and currency impacts.
Alcoa's alumina production saw a 4% quarterly decline, with the Kwinana refinery fully curtailed. However, aluminum production continued its upward trend, rising 3% sequentially, marking the eighth consecutive quarter of growth.
Despite these production dynamics, the company experienced a free cash flow (FCF) burn of $43 million, a stark contrast to the $101 million FCF reported in the second quarter, driven by higher commodity prices that led to increased working capital use.
The analyst noted that alumina prices, which have soared by 93% year-to-date, have reached levels not seen since early 2018. The market is expected to remain tight through the first half of 2025. Alcoa has achieved more than 80% of its targeted $645 million in run-rate savings, with significant contributions from raw material cost efficiencies.
The remaining savings are anticipated to come from the curtailment of Kwinana, the ramp-up of operations at Warrick and Alumar, and potential benefits from the Inflation Reduction Act (IRA).
Looking ahead to the fourth quarter, JPMorgan anticipates further benefits from delayed alumina pricing adjustments before a normalization later next year. Additionally, updates are awaited on the proposed resolution for the San Ciprian facility, which depends on cooperation between the government and unions before funding constraints become critical in the upcoming months. Following Alcoa's recent market performance,
InvestingPro Insights
To complement JPMorgan's analysis of Alcoa Corp (NYSE: AA), recent data from InvestingPro provides additional context for investors. Despite the company's recent strong performance, InvestingPro data shows that Alcoa is not profitable over the last twelve months, with a P/E ratio of -28.31. This aligns with JPMorgan's cautious Neutral rating.
However, InvestingPro Tips suggest that net income is expected to grow this year, and analysts predict the company will be profitable this year. This potential turnaround could explain the recent stock price strength, with Alcoa showing a strong return of 53.57% over the last year and trading near its 52-week high at 92.5% of that level.
The company's revenue for the last twelve months stands at $10.7 billion, with a slight decline of 1.53% year-over-year. However, the quarterly revenue growth of 8.27% in Q2 2024 indicates a possible reversal of this trend, which could support the positive outlook on future profitability.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for Alcoa, providing a deeper understanding of the company's financial health and market position.
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