Citigroup: Alcoa Fairly Valued At Current Levels, But Constructive In The Longer Term

Alcoa Corp AA shares have returned 60 percent over the past year, rendering their valuation unattractive, according to an analyst at Citigroup.

On Monday, however, the stock plummeted 13 percent after the U.S. Treasury issued a six-month reprieve on sanctions levied on Rusal, one of Alcoa's rival operating out of Russia.

The Analyst

Alexander Hacking downgraded the aluminum maker from Buy to Neutral and maintained his $57 price target.

The Thesis

Alcoa's stock saw a sharp uptick in recent weeks, towing in line with higher aluminum prices, Hacking said in a Tuesday note. The analyst noted aluminum prices have risen by 25 percent and alumina prices by 100 percent, underlining the potential supply chain fragility.

Much of the upside in Alcoa is driven by "quasi-temporary factors" such as the Alunorte outage, 232 tariffs, Russia sanctions and U.S. trucking constraints, according to Hacking. The analyst expects these issues to moderate over the next 12 months.

"Yet, this is the point of maximum disruptions, in our view, and Citi expects prices to retrench," Hacking said in the note.

Citigroup estimates lower prices of $2,200 for aluminum and $400 per ton for alumina in 2018. Against this backdrop, the analyst said Alcoa shares are fairly valued.

Hacking is constructive on Alcoa in the long term, given structural positives such as China's supply-side reform and cost support.

Price Action

Alcoa shares were down 3.6 percent to $50.03 at time of publication.

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