Alcoa Corporation (AA) and Aluminum Corporation of China Limited (ACH) are two prominent players in the aluminum industry. AA It engages in bauxite mining operations; and processes bauxite into alumina and sells it to customers who process it into industrial chemical products and aluminum smelting and casting businesses. It owns hydropower plants that produce and sell electricity to the wholesale market, large industrial consumers, distribution companies, and other generation companies. China-based ACH is an aluminum producer with bauxite and coal mining operations, alumina refining, and primary aluminum smelting. The company operates through five segments—alumina, primary aluminum, trading, energy, corporate, etc. It also acquires, manufactures, and distributes bauxite mines and limestone ore and provides engineering project management and research and development services.
The resumption of industrial and economic activities led to the aluminum market witnessing strong demand and rising prices. Moreover, the intensifying supply chain disruptions and production cuts, and lockdowns in China accelerated the increase in aluminum prices.
Investors’ interest in this space is evident from the iPath Series B Bloomberg Aluminum Subindex Total Return ETN’s (JJU) 15.5% gains year-to-date versus the SPDR S&P 500 Trust ETF’s (SPY) negative returns. The global aluminum market is expected to grow at a 6.5% CAGR to reach $235.80 billion by 2025. So, both AA and ACH should benefit.
While ACH gained 0.7% year-to-date, AA surged 45.9%. ACH is a clear winner with 163.4% gains over the past year versus AA’s 13.6% returns. But which of these stocks is a better pick now? Let’s find out.
Recent Financial Results
AA’s revenues for its fiscal 2022 first quarter ended March 31, 2021, increased 14.7% year-over-year to $3.29 billion. The company’s pre-tax income came in at $763 million, representing a 144.6% rise from the prior-year period. Its adjusted net income came in at $577 million, representing a 284.7% year-over-year improvement. AA’s adjusted EPS increased 287.3% year-over-year at $3.06.
For its fiscal 2021 full year ended December 31, 2021, ACH’s operating income increased 28.8% year-over-year to RMB269.75 billion ($41.82 billion). The company’s operating profit came in at RMB26.48 billion ($4.11 million), up 115% from the prior-year period. Its pre-tax income came in at RMB10.18 billion ($1.58 billion), representing a significant increase from the year-ago period. While its net profit increased 1586.9% year-over-year to RMB7.03 billion ($1.01 billion), its EPS grew 853.3% to RMB0.29.
Past and Expected Financial Performance
Over the past three years, AA’s revenue, EBITDA, and tangible book value have decreased at CAGRs of 3.2%, 0.8%, and 6%, respectively. AA’s revenue is expected to increase 16.8% year-over-year in fiscal 2022, ending December 31, 2022, and decline 1.8% in fiscal 2023.
Over the past three years, ACH’s revenue, EBITDA, and tangible book value have increased at CAGRs of 14.4%, 23.6%, and 2.9%, respectively. Analysts expect ACH’s EPS to grow 3.9% year-over-year in fiscal 2022, ending December 31, 2022, and decline 4% in fiscal 2023.
Valuation
In terms of forward EV/Sales, AA is currently trading at 1.21x, 101.7% higher than ACH’s 0.60x. In terms of trailing-12-month Price-to-Book, ACH’s 1.06x compares with AA’s 3.43x.
Profitability
ACH’s trailing-12-month revenue is almost 3.5 times AA’s. However, AA is more profitable, with a 25.1% gross profit margin versus ACH’s 10.2%.
Furthermore, AA’s levered free cash flow margin and net income margin of 13.9% and 3.5% compare with ACH’s 8% and 1.9%, respectively.
POWR Ratings
While ACH has an overall A grade, which translates to Strong Buy in our proprietary POWR Ratings system, AA has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both ACH and AA have a C grade for Sentiment, consistent with analysts’ expectations of declining revenues. ACH’s revenue is expected to fall 4% year-over-year to $42.28 billion for its fiscal 2022 ending December 31, 2022. The consensus estimate of $14.13 billion for AA’s fiscal 2022 revenue represents a 3.4% decline from the prior-year period.
ACH has an A grade for Value, reflecting its lower-than-industry valuation ratios. ACH’s 1.06x trailing-12-month Price/Book is 53.7% higher than the 2.30x industry average. AA’s C grade for Value is in sync with its slightly higher-than-industry valuations. AA has a 3.43x forward Price/Book, 48.9% higher than the 2.3x industry average.
Of the six stocks in the B-rated Aluminum industry, ACH is ranked #1, while AA is ranked #2.
Beyond what we have stated above, our POWR Ratings system has also graded ACH and AA for Quality, Stability, Momentum, and Growth. Get all ACH ratings here. Also, click here to see the additional POWR Ratings for AA.
The Winner
Growing demand for aluminum from various industries and surging prices should benefit AA and ACH. However, relatively lower valuations make ACH a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Aluminum industry.
AA shares were trading at $72.66 per share on Thursday afternoon, down $14.27 (-16.42%). Year-to-date, AA has gained 22.09%, versus a -7.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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