This was one of the earliest stocks we ever covered back in July of 2020. Back then if you bought $5K worth of Alcoa, that $5K would have transformed too $15,000 in only one year (~200% gain). Fast forward to today and something though has fundamentally changed regarding their business and our outlook for them.
That is the Donald Trump and Joe Biden global trade tariffs with China, Russia, the Middle East and the rest of the world. Those trade tariffs has drastically helped American producers over the last year. Those tariffs have amounted to over $100B in duties levied and drastically helps companies like Alcoa. While the prices of those materials have hurt consumers (one of the input's into the inflation we are currently seeing), companies like Alcoa have been benefitting from the drop in competition from offshore producers. While some people have called for them to end, we forecast these tariffs to continue thus increasing our outlook for companies like Alcoa.
What does this translate into though for their stock price? Let's break it down below:
Tariff Overview:
While the trade tariffs have hurt many aspects of American life, they've also drastically helped others. One of the largest beneficiaries has been Alcoa. Why? For a few reasons:
- The way tariffs work is by taxing foreign countries on their export of goods into a domestic country. Foreign companies therefore have three options: 1) They can pass on the increase in cost to consumers by increasing the cost of their goods. 2) They can "eat" the costs themselves and keep prices for consumers stable - but this will hurt their profit margins. 3) They can cease trading with the foreign entity taxing them altogether. This is because tariffs disincentivize foreign companies from wanting to work with other countries. In the case of the US, they have reaped in $11 billion alone from Trump’s steel and aluminum tariffs.
- The reason a country would do this is to help the producers in their own country. By forcing foreign companies into one of the three options below, domestic producers can only benefit. Should a foreign company choose option 1, domestic producers can offer the same good but for cheaper. Should they choose option 2, it'll likely decrease their output thus increasing the domestic companies output. And should they choose option 3, the benefit for the domestic producer is obvious. The net effect to global trade is often a decrease in economic output but the net effect to domestic production can often be positive.
- In the case of Alcoa, these tariffs have massively increased their domestic production capabilities as they can totally bypass all tariffs thereby increasing their go to market capabilities! This has resulted in some stellar financial results!
Financial Results:
During their most recent financial earnings call, they absolutely smashed expectations largely due to the positive macroeconomic factors. The numbers came back for them as such:
- Their revenues for Q1 were $2.83B. This number can on the heels of expectations of $2.6B.
- Q1 EBITDA was reported at $618M vs expectations of $600M.
- Looking further their EPS numbers beat the street's expectations at $1.49 vs. $1.37.
- Alcoa is actively liquidating large matured fixed assets to fund future investments. At a balance sheet over $14B in assets, Alcoa has the financial backing to fund future investments.
The takeaway here: Alcoa is crushing it. Their path forward is clear and the macro factors are truly starting to show.
Other Benefits:
- Russia has also responded by looking to impose export tariffs of their own - further helping AA and the price of aluminum. This news is breaking and comes on the front of the the Russian economy minister saying they're looking to combat domestic prices. He suggested an export taxes of close to 15%. This tax should marginally help prices of aluminum and other metal products outside of Russia - thus helping Alcoa.
- Outside of the tariffs, Alcoa also has another major macro tailwind coming their way and that is in the form of China's decarbonization policies. These polices allow Alcoa to benefit from a structural change in the aluminum market led by China's policy. The reason for this change is due to 5% of the China's carbon emissions coming from these sources. With a change in the overall supply, we believe this further benefits Alcoa and shores up more room for them to grow.
Conclusion:
The growth story here is clearly intact. By a combination of tariffs, strong financial performance and macro tailwinds, Alcoa is in a position to keep growing and adding to an already stellar 2020 performance. We therefore are updating our price target to reflect this increase in growth. When factoring this growth in our long run financial model we arrive at a price target of $47! We therefore are remaining overweight our position and are looking for relative drops before adding more exposure.
Rating: Overweight
Price Target: $47 (38% upside)
Target Date: 8-10 Months
Ticker: AA