Shares of Alcoa Corp (NYSE:AA) are down nearly 50% from their high, and they move lower, but we don’t think they will go much lower. While aluminum prices are down sharply from their recent high, the outlook for demand is expansionary, and prices are expected to rebound by next spring. Near-term headwinds like lockdowns in China, supply chain disruptions, inflation, and fear of recession weigh on the outlook or prices, but many of those issues are temporary, and there are signs of relief. For one, lockdowns in China are essentially over; for another, shipping and freight issues are easing and aiding the current results. The takeaway is that Alcoa, unlike a large portion of the aluminum industry, is well-positioned for the dip in aluminum pricing and even able to increase its capital returns.
Alcoa is not a robust dividend payer, but it is a safe-looking distribution given its young age. The company has only been paying for the last few quarters, so there is some risk here, but the telltales are not signaling a warning. The $0.30 annual payout is about 11% of the Q2 earnings, let alone the FY comparison, which leaves ample room for future increases. The more important factor for investors to be aware of is the share repurchase program which we see aiding today’s opportunity. The company repurchased shares worth about 3% of the current market cap and increased the authorization by another $0.50 billion or 6% of the market cap. Assuming the results continue to come in as the company expects, we see the buyback increase again by the end of the fiscal year, if not sooner.
Alcoa Revenue Up 35% From Pre-Pandemic Levels
Alcoa had a strong quarter and that puts the outlook into a different perspective. The potential for flat earnings over the next quarter or two means earnings will track at a record level for the next quarter or two, and we like the sound of that. Until then, the Q2 revenue came in at a record $3.64 billion for a growth of 28.6%. This is on top of last year’s 31% advance and is up 34% versus 2019. The gain was driven by the combination of pricing and volume with Alumina (OTC:AWCMY)'s net revenue up 26% sequential and Aluminum up 6%.
Alcoa posted a strong margin as well, with the operating margin up more than 100 basis points on a GAAP basis. However, offsetting news is the adjusted operating margin contracted by 390 basis points. Still, there are mitigating factors, including a favorable reversal in accounting charges and a mark-to-market improvement in the value of energy derivative hedges. The $2.67 in adjusted EPS is up nearly 80% from last year and beat the Marketbeat.com consensus by $0.18.
The company did not give specific revenue or earnings guidance but commented on its expectations for volume. The company is upping its targets for aluminum volume, but a decline in Alumina and Bauxite offsets that. Regarding earnings, the company expects strength in the Bauxite segment but forecasts higher costs will cut into the Alumina and Aluminum segments. Mixed news but otherwise good news regarding the longer-term outlook and the forecast for aluminum prices.
The Technical Outlook: Alcoa Hit A Bottom
The price action in Alcoa hit bottom a few weeks before the earnings were announced, and it may be ready to reverse. The caveat is that price action has been tepid so far, which leads us to think a sideways movement is more likely. Assuming the stock can build a base of support at this level and deliver on its outlook, we see it moving sideways over the next few months and then higher. If the global economy continues to deteriorate, the stock could wallow at these levels for an extended period.
