Goldman Sachs Upgrades Alcoa (AA) to Buy

March 6, 2017 2:02 AM EST
Get Alerts AA Hot Sheet
Price: $33.58 -5.03%

Rating Summary:
    17 Buy, 12 Hold, 2 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 15 | Down: 17 | New: 13
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Goldman Sachs upgraded Alcoa (NYSE: AA) from Neutral to Buy with a price target of $52.00 (from $34.00).

Analyst Andrew Quail is positive on what he calls a "cash machine in supportive commodity environment." He also jacks up his EPS estimates for FY 2017 from $1.45 to $2.40, FY 2018 from $1.22 to $2.68, and FY 2019 from $1.23 to $2.89. Quail expects AA to generate about 12% free cash flow yield on average through 2018. Further, Quail notes how his estimates compare to the rest of Wall Street (emphasis ours): "We believe Street estimates underappreciate AA’s earnings power given the current macroeconomic background. Our new 2017/18 EBITDA expectations of $2,076/ $2,035mn are 10%/ 8% ahead of consensus estimates after reflecting our commodity team’s revised price deck. We expect upward revisions to consensus numbers to drive AA shares in the coming quarters as investors begin to appreciate the strong FCF generation ahead for Alcoa."

He lists the following three catalysts in a note to clients late Sunday evening:

  1. Improving industry market dynamics – Two key drivers that could improve supply/demand balance: China executing announced capacity cuts of 4mt annualized (1mt in 2017, 2mt in 2018), and any protectionist measures from the WTO case filed by the US on Chinese subsidized aluminum exports.
  2. Organic growth project updates – We anticipate timely updates on the company’s brownfield projects. Previously, Alcoa flagged 18 potential investments totaling $370mn in capex that it believes could generate greater than $300mn in annual EBITDA.
  3. Cash distributions – We expect AA’s free cash flow yield to average 12% through 2018, improving its ability to distribute cash to shareholders either through dividends, special dividends, or share repurchases.

We should note also for Street Insider readers that this upgrade comes on the heels of a very bullish note from Goldman's commodity team which was also released on Sunday. In that note analyst Yubin Fu raised estimates for aluminum pricing "to $1,950/2,000/2,100/t, and our year average forecasts for 2017 and 2018 to $1,942/t and $1,950/t" due to China's first time commitment to reducing aluminum and alumina capacity "by 30% during the winter heating season (Oct-Mar), in regions surrounding Beijing in an effort to combat air pollution."

For an analyst ratings summary and ratings history on Alcoa click here. For more ratings news on Alcoa click here.

Shares of Alcoa closed at $36.38 Friday.



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