Alcoa Corporation (NYSE:AA) has been in a sustained downtrend in the last one year. During this period, Alcoa stock has declined by 44%. With the company recently reporting fourth quarter 2019 results and providing an initial outlook for 2020, there are reasons to remain bearish.
In particular, Alcoa stock will be impacted by macroeconomic headwinds even as the company tries to improve its credit profile. I therefore believe that investors can stay in the sidelines with Alcoa stock likely to remain sideways to lower.
Starting with the fundamentals for aluminum, Alcoa expects that the global markets “will turn to surplus” in 2020. A similar opinion comes from Jefferies LLC analysts that “China overcapacity remains a problem for the aluminum market with no change on the horizon.”
I must mention here that these views have still not discounted the impact of coronavirus outbreak. As an example Citigroup has already revised China’s forecast to 5.5% from an earlier 5.8%.
In the coming quarters, it would not be surprising to see Alcoa talk about higher surplus of aluminum than expected. This will further put pressure on EBITDA margin and cash flows.
Credit Metrics Can Still Improve in 2020
For FY18, Alcoa reported adjusted net debt (including pension and OPEB liabilities) of $3,250 million and an EBITDA of $3,129 million. This translates into a debt-to-EBITDA (leverage) of 1.04.
For FY19, the company’s adjusted net debt was $3,385 million with EBITDA of $1,656 million. The company’s leverage has therefore increased to 2.04. This worsens the company’s credit metrics and it’s unlikely that in 2020, EBITDA will improve as compared to 2019.
However, I still believe that the company can lower leverage in 2020.
Recently, Alcoa announced the sale of its waste treatment facility in Gum Springs for a consideration of $250 million. Alcoa plans to sell non-core assets worth $500 to $1,000 million in 2020. If the higher end of the target is achieved, the balance sheet stress can be reduced on a relative basis.
I want to add here that for FY19, Alcoa reported negative free cash flow of $114 million. Even if the company is conservative in capital expenditure, FY20 can be another year of negative FCF. However, that should not worry the markets as Alcoa has a cash buffer of $879 million as of Q4 2019.
Overall, from a financial perspective, Alcoa is well positioned to navigate the challenges in 2020. However, Alcoa stock will be impacted due to weak industry conditions.
Alcoa Stock Worth Considering Beyond 2020
I am bearish on Alcoa stock for 2020, but I do believe that the stock is attractive beyond 2020. Further, if there is a sharp correction from current levels, the stock can be accumulated.
I want to mention that Apple (NASDAQ:AAPL) recently bought the first-ever carbon-free aluminum from Alcoa and Rio Tinto (NYSE:RIO) venture. The venture plans to “commercialize a technology by 2024 that uses a ceramic anode to make aluminum and emits only oxygen.”
The point I am trying to make is that with environmental concerns, Alcoa is high on innovation. This will help drive long-term growth.
Another important point to note is that aluminum price outlook might be bearish for 2020. However, according to World Bank and International Monetary Fund forecast, prices will trend higher in 2021 and beyond.
Alcoa therefore needs to navigate this challenging period and the company is positioned from a financial perspective to emerge unscathed.
My Concluding Views on Alcoa Stock
Alcoa stock has witnessed a sharp decline in the past year. Considering the macroeconomic headwinds, the stock is unlikely to trend higher in 2020.
However, the key positive is that the company’s balance sheet remains strong. Further, Alcoa can possible see renewed margin expansion in 2021.
Therefore, Alcoa stock is worth keeping in the investment radar and worth considering for long-term on any sharp correction from current levels.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.