Why Alcoa Corp Stock Is a Solid Buy on This Earnings Dip

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Alcoa Corp (NYSE:AA) disappointed investors with its earnings report on Jan. 17. Both earnings and revenue came in lower than expected, sending AA stock downward.

However, now that Alcoa focuses only on aluminum itself, the company has become a pure commodity play. This bodes well for the future of the company, as the continuous growth of East Asia marches on. With increasing demand from China and other countries, AA stock finds itself well-positioned to benefit from the rise of Asia.

Given recent occurrences, one might think the company is pulling back. The former Aluminum Company of America had been a Dow Jones component until 2013. However, one must remember that the aerospace and automotive parts businesses have become a separate company called Arconic Inc (NYSE:ARNC). This breakup makes Alcoa a pure commodity play, and ironically, the company now truly lives up to the “Aluminum Company of America” name it no longer uses.

Alcoa had also been the company to kick off every earnings season. This tradition ended when the division that is now Arconic split from the company; however, AA still remains one of the first to report.

AA Stock Sold Off on Lower Than Expected Earnings

After its latest earnings report, some investors might wish Alcoa had become the last to report. Earnings came in at a loss of $1.06-per-share, compared to a 68-cent loss in the year-ago quarter. On an adjusted basis, the company reported profits for the fourth quarter of $1.04-per-share, which falls short of the consensus estimate of $1.23-per-share.

Revenue also missed, coming in at $3.17 billion when Wall Street had expected $3.29 billion. The company blamed higher energy and raw material costs as well as currency exchange rates for the lower earnings. Alcoa stock saw a massive selloff following this announcement. Its peers Kaiser Aluminum Corp. (NASDAQ:KALU) and Century Aluminum Co (NASDAQ:CENX) also traded lower.

Why Alcoa Stock Will Rise Again

Due to the selloff, the lower AA stock price can serve as a buying opportunity for those interested in the stock. And now that Alcoa stock is a pure aluminum play, it will serve as a proxy for rising aluminum prices. Like oil and other commodities, aluminum prices hit a multi-year low in early 2016 but have been rising since.

Furthermore, like its primary product, AA also has enjoyed steady growth since early 2016. Increasing aluminum consumption forecasts — mostly due to rising demand from China — have been credited with this latest boom.

Management also forecasts demand will rise by 4.25% to 5.25% in the coming year. This demand has sent earnings predictions for 2018 steadily higher. Analysts project a 20% increase in earnings for fiscal 2018. After 2018, they believe earnings growth will slow down in 2019 and fall in 2020. Despite the future drop off, there’s still time to enjoy AA stock’s growth.

Best of all, the improving earnings will place the forward price-to-earnings (P/E) ratio at 15. This is well below S&P 500 and industry averages. These factors, along with 20% earnings growth, make Alcoa stock difficult to bet against.

The Bottom Line on AA

Despite a disappointing earnings report, aluminum has steadily increased in price on steadily rising demand. This can only benefit Alcoa stock.

While it’s true that investors did not react well to earnings, the report should serve as a blip on an otherwise positive growth trend, and possibly a buying opportunity in AA. With its aero and auto businesses now a separate company, Alcoa’s focuses purely on aluminum. Its product has enjoyed steady growth as China’s growth continues. With its new focus, Alcoa has positioned itself to grow along with this trend.

For investors that want a commodity play in the aluminum space, AA stock provides a profitable vehicle where their portfolios and commodity investments can grow.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/alcoa-corp-stock-solid-buy-dip/.

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