Aluminum is the third-most-common element in the Earth’s crust, and several industry trends suggest demand could surge in the coming years. However, supply trends aren’t as pretty, making aluminum stocks unattractive in the near term. Nonetheless, in this piece, we compared two aluminum manufacturer stocks to see which is better. Alcoa (NYSE:AA) and Arconic (NYSE:ARNC) were once part of the same company under the Alcoa name, but the separation in 2016 has set each on their own path.
Alcoa (AA)
Alcoa has some things going for it versus Arconic, but it also has some things working against it. Alcoa’s balance sheet is in decent shape, and it’s becoming a leader in low-carbon aluminum. However, low aluminum prices are weighing on its results, and it’s struggling to turn a profit (it lost $120 million in the past 12 months). Additionally, it’s looking more and more like a supply glut is building. As a result, a neutral view looks appropriate for Alcoa at this time.
The aluminum industry as a whole is going through a transitional period. Jorge Vazquez of consultancy Harbor Aluminum told The Street that excess aluminum inventory is a growing risk. While demand surged this year, it’s starting to ease, meaning the oversupply built up during the pandemic may be sitting in stockpiles for a while.
Over the long term, aluminum sales could reach $238 billion by 2028, up from $142 billion in 2021. The metal’s price reached an all-time high earlier this year due to a post-pandemic consumption boom that boosted demand for electric vehicles, equipment to generate renewable energy, and appliances. Additionally, the transition to EVs has increased the amount of aluminum typically used for automobiles from about 300 pounds per vehicle to between 500 and 800 pounds.
However, for now, Alcoa is struggling to turn a profit, and Wall Street is punishing unprofitable companies. Additionally, rising interest rates are likely to take a bite out of vehicle purchases. With $1.4 billion in cash and equivalents, the good news is that the company looks like it might have enough cash to make it through until the secular trends for aluminum turn around.
What is the Price Target for AA Stock?
Alcoa has a Moderate Buy consensus rating based on three Buys, five Holds, and zero Sell ratings assigned over the last three months. At $46, the average price target for Alcoa implies downside potential of 1.2%.
Arconic (ARNC)
Arconic faces most of the same problems as Alcoa, although its biggest problem is its balance sheet — especially since it’s struggling to turn a profit right now. Although the company’s debt position isn’t dire, it could take some time for it to turn around. Thus, a bearish view looks appropriate, at least for now.
Arconic also faces the additional issue of aluminum prices. While it benefits from high prices to some extent, it also takes a hit because aluminum is one of its input materials to make the products it sells to the automotive, aerospace, industrial, and commercial transportation industries.
Management cut its estimates with Arconic’s third-quarter earnings report, further cementing concerns about the company’s near term. The company’s cost of goods sold has gone up meaningfully year-over-year, rising from $1.7 billion to $2.1 billion and resulting in a third-quarter operating loss of $36 million.
With only $312 million in cash and equivalents and $2 billion in current liabilities, Arconic might have trouble making it through to better days. However, if it can manage to do so, its products address attractive end markets like electric vehicles, where demand is set to explode. Arconic did manage to sell its Russian operations for $230 million, so that is a spot of much-needed good news.
What is the Price Target for ARNC Stock?
Arconic has a Moderate Buy consensus rating based on one Buy, two Holds, and zero Sell ratings assigned over the last three months. At $23.33, the average price target for Arconic implies upside potential of 10%.
Conclusion: Neutral on AA, Bearish on ARNC
The secular trends in the aluminum industry are simply unattractive right now. Both Alcoa and Arconic are struggling to turn a profit while a supply glut appears to be building, so neither looks attractive in the near term. However, Arconic’s debt could become a problem, especially as it struggles to turn a profit. Thus, a neutral view looks appropriate for Alcoa, with a bearish view for Arconic.
In the long term, the aluminum industry looks bright due to the metal’s role as a key ingredient in the transition to clean energy. Thus, if these companies can survive, Alcoa and Arconic could eventually be in very attractive positions.
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