UPDATE: Citi Upgrades Alcoa (AA) to Buy

December 1, 2014 8:34 AM EST
Get Alerts AA Hot Sheet
Price: $37.06 -0.46%

Rating Summary:
    18 Buy, 11 Hold, 2 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 18 | Down: 12 | New: 23
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(Updated - December 1, 2014 9:55 AM EST)

Citi resumed/upgraded Alcoa (NYSE: AA) from Neutral to Buy with a price target of $21. Analyst Brian Yu expects earnings improvement as aluminum prices climb to $1.00/lb in 2017.

"The upgrade to Buy from Neutral primarily reflects improving profits from the company’s upstream businesses - Alumina and Primary Metals. After incorporating our new commodity price forecasts, we estimate EPS for 2014 of $0.82, 2015 of $1.02 and 2016 of $1.19. Our target price of $21/sh is based on a combination of forward P/E ($21/sh), EV/EBITDA ($23/sh) and DCF modeling ($18/sh) with respective weightings of 40/40/20," said Yu.

"While LME aluminum prices have improved 17% YTD (or $0.14/lb), regional premiums have also risen globally (+$0.12/lb in North America, +$0.10/lb in Europe, and +$0.07/lb in Japan), contributing to the bulk of the EBITDA improvement at the company. Compared to the $1.2 bln of EBITDA generated in 2013 from Alumina and Primary Metals combined, we estimate that these two segments will generate EBITDA of $2.1 bln in 2014 and $2.7 bln in 2015. We expect LME aluminum prices to average higher over time, hitting $0.95/lb in 2016 and $1.00/lb in 2017, lifting the upstream segment profits in excess of $3.0 bln in 2017. EPS sensitivity to every 0.01/lb change in aluminum pricing is roughly $0.03/sh," continued the analyst.

"We note that $1.00/lb aluminum is hardly a bullish forecast relative to more recent history and primarily reflects a recovery from the bottom as producers curtailed production in response to low pricing. Coupled with solid demand growth and financing deals, LME inventories have been drawn down, leading to tighter markets. However we believe the aluminum market remains in a surplus, but days of inventory on hand is easing (7.7 weeks in 2013 vs 7.6 weeks in 2014 and 7.5 weeks in 2015)," he added.

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 $17.29 yesterday.



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