BofA/Merrill Lynch Upgrades Alcoa (AA) to Buy on Cash Flow Recovery
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BofA/Merrill Lynch upgraded Alcoa (NYSE: AA) from Neutral to Buy with a price target of $18.00 (from $16.00) saying a cash flow recovery is looming.
Analyst Timna Tanners cited 1) a better cash flow outlook; 2) improved aluminum fundamentals; and 3) additional positive catalysts.
"With much of the costs related to closing high-cost operations now behind it and associated pension costs expected to also fall nearly $100M y/y, we expect FCF of $986B in 2015E and $1.3B in 2016E from an anticipated $288M in 2014E and $385M in 2013," Tanners said.
The firm believes consensus estimates and Al price forecasts are too low. "Even with a combined flat LME and Midwest premium
for 2015E y/y we arrive at $1.05 EPS and $4.1B EBITDA, well above consensus at $0.85 and $3.8B. Permanent closures and better demand have helped the market," the analyst said. "We don’t factor in its announced Firth Rixson acquisition, providing upside for ‘16E."
The analyst sees upside to $21 if they assume Midwest premiums are steady.
The firm raised FY 2014 EPS from $0.70 to $0.80, FY 2015 EPS from $0.85 to $1.10 and FY 2015 EPS from $0.95 to $1.15.
Shares of Alcoa closed at $15.93 yesterday.
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