Alcoa Corporation (AA) produces and sells bauxite, alumina, and aluminum products in the United States, Spain, Australia, Brazil, Canada, and internationally. Fitch Ratings recently upgraded AA’s long-term issuer default ratings to 'BBB-' from 'BB+,' citing AA’s modest debt level and reduced pension obligation, its flexibility in operations, and stable position in the industry. The shares of AA. which is headquartered in Pittsburgh, Pa., have gained 108.5% in price over the past year and 110.7% year-to-date. Over the past five days, the stock has gained 10.2% to close yesterday’s trading session at $49.98. It is currently trading below its 50-day and 200-day moving averages. The 12-month median price target of $59.40 indicates a potential 18.9% upside from its last closing price.

Last month, AA  announced the restarting of its smelting capacity at its  Portland Aluminum smelter in Australia. The smelter will be operating at 95% capacity. AA also intends to resume using its Alumar smelter in Brazil. “Restarting the idle capacity improves the smelter’s cost structure, competitiveness, and longer-term sustainability,” explained Michael Gollschewski, Alcoa’s vice president of operations and president of Alcoa Australia. With the restarting of both the facilities, AA will be operating at 82% of its global smelting capacity.

With governments worldwide pushing for decarbonization, aluminum-producing companies’ prospects have become more positive. Aluminum’s light weightiness and recyclability make it a critical metal in producing electric vehicles (EV). The push for EVs is expected to drive the demand for the metal even higher. And AA’s recent announcement that it will resume operations at its long-standing facilities should enable the company to capitalize on the growing demand. Furthermore, S&P Global Market Intelligence expects metals prices to remain above historical averages through 2025.

Here is what could shape AA’s performance in the near term:

Reasonable Valuation

In terms of forward P/E, AA is currently trading at 7.28x, which is 51.3% lower than the 14.95x industry average. Also, its 0.88 forward EV/Sales ratio is 51.7% lower than the 1,82 industry average.

Furthermore, AA’s forward Price/Sales is 49.6% lower than the 1.48x industry average, and its 15.9% forward Price/Book is lower than the 2.46x industry average.

Favorable Analysts Estimates

Analysts expect AA’s revenues to increase 41.5% in the current quarter and 20.9% in the next quarter. Also, its revenue is expected to grow 32% year-over-year to $12.26 billion in the current year. The company’s EPS is expected to rise 734.6% in the current quarter and 136.7% in the next quarter. And the Street expects AA’s EPS to rise 644.8% year-over-year to $6.32 in the current year, while its  EPS is expected to grow 199.7% per annum over the next five years.

Of the 11 Wall Street analysts that rated the stock, nine rated it Buy, and two rated it Hold.

Solid Earnings Report

AA’s revenues increased 31.5% year-over-year to $3.11 billion in its fiscal third quarter, ended September 30. On a sequential basis, its revenue has increased 10%, driven by higher aluminum and alumina prices and higher premiums for value-add products. Its adjusted EBITDA stood at $728 million, up 156.3% from the same period last year. AA reported its highest quarterly net income and earnings per share. Its net income attributable to the company grew 787.8% from its  year-ago value to $337 million. And the company’s EPS increased 776.9% year-over-year to $1.76. In addition, its adjusted EPS came in at $2.05, topping the $1.80 consensus estimate  by 13.9%.

POWR Ratings Show Promise

AA has an overall B rating, which translates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a B grade for Quality. This is justified because  its ROE and ROTC are 22.47% and 12.88%, respectively, which are 88.4% and 70.7% higher than the industry averages.

AA has an A grade for Growth, consistent with its stable rise in financials in its last reported quarter.

Of the six stocks in the Aluminum industry, AA is ranked #3.

Beyond what I have stated above, one can also view AA’s grades for Value, Stability, Momentum, and Sentiment here.

View the top-rated stocks in the Aluminum industry here.

Bottom Line

AA’s stock has gained in price significantly over the past year, and Wall Street analysts see further upside. The company’s plan to increase its operations on a global scale is expected to benefit it  because the demand for aluminum is increasing. Analysts expect substantial earnings growth in the current quarter. And  considering AA’s significantly higher than industry ROE and a reasonable valuation, we think it could be a solid buy.

How Does Alcoa Corporation (AA) Stack Up Against its Peers?

AA has an overall POWR Rating of B. However, one could also check out these other stocks within the Aluminum industry with a B (Buy) rating: Aluminum Corporation of China Limited (ACH) and Constellium SE (CSTM).

AA shares rose $0.43 (+0.86%) in premarket trading Friday. Year-to-date, AA has gained 117.39%, versus a 26.37% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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