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Bullish on Alcoa for the medium-term

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On its official website, Alcoa claims to have invented the Aluminum industry in 1888. They are world leaders in Bauxite mining, alumina refining, and Aluminum smelting. The current company was separated from the erstwhile parent company ‘Alcoa Inc’ in November 2016, which was renamed as Arconic Inc.

We dive deep into the factors that are in favor of Alcoa below.

High Aluminum prices that can rise even higher, low debt levels, a good buyout candidate, a great pedigree of 120 years and one of top 10 Aluminum producers in the world are some of the reasons that make Alcoa a good buy from a medium-term perspective.

  • Aluminum prices are likely to rally higher towards $2000 per ton
  • LME aluminum stocks level is depleting quickly
  • China factor will influence Aluminum
  • Strong quarterly performance
  • Analysts are bullish on the company
  • A good buyout candidate

High Aluminum Prices

Aluminum prices have risen sharply from the lows in October 2015 and are consolidating near the highs since February of this year. A breakout of the 52-week highs will push prices above the $2000 per ton, which is a positive for Alcoa because alumina and aluminum are its major revenue sources.

Depleting LME Aluminum Stocks Level will Support Aluminum Prices

LME’s Aluminum stocks level has fallen sharply from 5500000 tons to less than 1500000 tons in the recent months. Though some reports point to abundant off-market stocks of Aluminum, the market is still tightening. One of the reasons for a tighter market is China.

The China Factor can Push Aluminum Prices Higher

China is one of the largest miner, refiner, and user of aluminum. Therefore, it’s growth and internal policies regarding aluminum will affect its prices globally.

Chinese Premier Li Keqiang while speaking at the World Economic Forum’s “Summer Davos” event in Dalian, China, from June 27-29, said that his country was committed to addressing the climate change issues.

Li also added:

China’s economy in the second-quarter maintained the first quarter’s steady and improving momentum. We are fully capable of achieving the main economic targets for the full year. Currently, China also faces many difficulties and challenges, but we are fully prepared, reports Reuters.

Both the above issues are positive for aluminum prices, which is already an outperformer compared to steel and copper in 2017.

In our view, this strong performance has reflected an increase in the potential for aluminum to be the next target of supply-side reform in China, a tightening ex-China balance, and rising costs of production,” wrote Goldman Sachs analysts. “Further, global political developments may also be supportive of capacity and production cuts, given the two leaders of the U.S. and China launched a 100-day (trade) plan on April 7. These developments support our existing view that aluminum is the next target for supply-side reform in China.

Therefore, the investment bank is bullish on Aluminum with a price target of $2000 per ton in six months and $2100 per ton in a year.

However, UBS analysts believe that aluminum prices are unlikely to see a bump up similar to coal. “While the audit on illegal capacity is quite substantial, it’s unclear whether that will lead to a large closure of excess capacity,” said says Daniel Morgan, senior commodities analyst at UBS, who recently returned from an investor trip to China, reports The Sydney Morning Herald.

Only time will tell which of the two forecasts will play out. However, China has few options if it wants to protect its citizens from the hazards of air pollution. Therefore, we expect the Goldman Sachs thesis to play out.

So, we have more or less established that aluminum prices will either stabilize or rally about 10% from the current levels. However, how does this make Alcoa a good investment bet? Let’s analyze.

How has Alcoa Performed in the First Quarter of This Year

Alcoa has benefitted from higher alumina and aluminum prices as seen in the Q1 2017 results. Revenues have increased 5% sequentially to $2.7 billion. On these revenues, the company’s earnings before interest, tax, depreciation, and amortization (EBITDA), excluding special items, grew 59% sequentially helping the company to report an adjusted net income of $117 million, or $0.63 per share.

Financial Health of Alcoa and its Projections for 2017

The company has achieved a free cash flow of $3 million compared to negative $445 million of free cash flow on a carve-out basis in the same quarter of 2016. Alcoa’s return on capital at 6.2% was a huge 4.7% increase over the previous financial year.

The company has a total debt of $1.45 billion. However, with $804 million in cash, its net debt drops to $0.65 billion, which is very comfortable.

In 2017, Alcoa expects both Bauxite and Alumina to remain in a relative balance, however, it expects the demand growth for Aluminum to increase from its earlier forecast of 4% to a higher range of 4.5-5%.

It expects to earn an EBITDA of $2.1 billion to $2.3 billion in the current year with a targeted $50 million net performance improvement.

The company has also targeted a 200-basis point increase in its return on capital from a 2016 baseline to end-2019, normalized for market conditions and has targeted to match or better the returns of the S&P 500 index. Both these have been linked to the executive compensation.

Other Factors that can Cause Bullish Surprises

The analyst community is very bullish on Alcoa. There are 10 buy ratings and four hold ratings with an average price target of $41.1. The median P/E on current year’s estimate is 11.85, which is not high considering the S&P P/E which is above 21.

Recently, Gabelli analyst Justin Bergner reiterated his “Buy” on Alcoa with a target price of $50. Similarly, Goldman Sachs also has an aggressive target of $52 on the stock.

Meanwhile, rumors have been floating that rival companies are looking to buy Alcoa. If any company announces its intent to buy out Alcoa, it will offer a handsome return from the current levels.

What does the Chart Forecast for Alcoa?

Alcoa saw a nice run up from its lows to the highs of $40, reached in mid-February of this year. Price has been falling in a channel, which is a normal correction. A breakout of the channel will resume the uptrend in the stock opening up a possibility of a retest of the highs at $40, whereas, a fall can take it to the lower end of the channel at $28, which is a significant support.

We shall wait for a dip towards the $30-$31 levels to initiate a mid to long-term position on the stock. We shall keep a stop loss of $27 and expect the stock to reach its highs of $40.

Conclusion

We are in no hurry to chase Alcoa higher. We expect the S&P 500 to dip and Alcoa also to dip close to $30 levels, where we believe that it becomes a good buy. We want to hold this company for the medium to long-term as the future of Aluminum looks bright and Alcoa is a leaner and better company after its split from its parent.

Featured image from Shutterstock

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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4 Comments

4 Comments

  1. ishturman

    July 9, 2017 at 2:42 pm

    What timeframe is medium term? When you is good to buy and how many months. Is mrdium term?

  2. Rakesh Upadhyay

    July 9, 2017 at 3:10 pm

    Hello ishturman…

    I expect a correction in the S&P 500 to 2320 levels soon. At that time, I expect Alcoa to drop to about $31 or so. That should be a decent entry point as far as a good risk-reward is concerned. However, if the S&P 500 breaks 2320 levels, the purchase should be put on hold.

    As far as holding Alcoa is concerned, we expect Aluminum prices to increase in the second-half of this year into first-half of the next. Therefore, Alcoa should be held for anywhere between 1-2 years.

    Anything less than a year, I consider it as a short-term investment. 1-2 years is a medium-term play and anything more than 3 years is a long-term investment.

    Thank you

  3. felix

    August 3, 2017 at 11:23 am

    Hi Rakest,

    any update?

    Thanks

    • Rakesh Upadhyay

      August 3, 2017 at 12:35 pm

      Hello Felix,

      Alcoa never fell to our buy levels. The markets did not correct as I was expecting them to. At the current levels, Alcoa is very close to its overhead resistance of $40. I will prefer to wait.

      With warm regards
      Rakesh Upadhyay

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Commodities

Brent Crude Oil: $100 Per Barrel Is In Sight

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Crude oil has been moving steadily higher for months, despite a recent short-term blip, and it may not be long before we are looking at triple-digit prices once again. Eighty-dollar Brent is the most recent target, reflecting the highest level the commodity has seen in years and the closest its come to 2008 record highs of $150 per barrel.

And while market forces aka Saudi Arabia may be doing what they can to control the price, there is a wildcard that could send oil futures soaring to near $100 per barrel once again, and according to a market strategist on CNBC, it’s Venezuela.

Bob Parker of Quilvest Wealth Management said on the business network that Venezuela holds the key to unlocking near-$100 oil prices once again. If Venezuela, which is mired in economic depression, were to bring oil production to a total halt, it could serve as an impetus to send crude oil futures soaring to levels not witnessed in years.

A combination of production cuts inspired by OPEC and rising demand around the world has thrust the oil price to the $80 per barrel level in May, back to 2014 levels. Surplus worries have taken some steam out of the rally, at least in the short-term, as the US has been ramping up production. But Saudi Arabia has still been calling the global shots, and they like oil in the $70-$80 range.

The Wall Street Journal

Parker believes that the oil kingpins — Saudia Arabia, other OPEC nations and Russia — have reached their goal to “clear this industry from overhang from the oil market.” It’s been on again, off again for production cues, and if they had their way, oil prices would persist at current levels.

“I think what they are concerned about is that they ideally would like to avoid a spike in the oil price, let’s say towards $100 a barrel, because they are very sensitive to the fact that a spike would then lead to a generalized global downturn,” Parker told CNBC.

Venezuela Wildcard

Energy is the heart of the Venezuelan economy, and therefore it’s the industry that’s been hit the hardest. It’s been displaced by Colombia for oil exports to the U.S., and production has been falling sharply.

Latin American crude production has been slashed by some 40% in the past three years and is currently hovering at about 1.4 million barrels per day amid Venezuela’s hyperinflation and food crisis. If Venezuelan production were to come to a complete halt, and there’s no indication that the worst is over, it could thrust crude futures back to triple-digit- territory.

It’s not just one market strategist that predicts $100 per barrel oil. RBC’s Helima Croft similarly believes that a perfect storm could send Brent up to lofty levels, with the Venezuelan economic demise the deciding factor.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 16 rated postsGerelyn has been covering ICOs and the cryptocurrency market since mid-2017. She's also reported on fintech more broadly in addition to asset management, having previously specialized in institutional investing. She owns some BTC and ETH.




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Commodities

Oil Prices Post Biggest Drop in a Year as Russia, OPEC Weigh Abandoning Output Deal

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Oil prices sold off Friday at their fastest pace in a year after major energy producers said they may soon begin lowering production limits.

Energy Ministers Weigh Easing Output Caps

A group of two-dozen producer nations are considering a gradual exit from an output deal put in place last year to rebalance an oversupplied crude market. Under the deal, Russia, OPEC and others agreed to reduce crude supplies by 1.8 million barrels per day.

Russia was especially vocal about lowering and eventually abandoning output quotas in support of a balanced market after Moscow’s energy minister met with his Saudi counterpart in St. Petersburg.

“The moment is coming when we should consider assessing ways to exit the deal very seriously and gradually ease quotas on output cuts,” Russian energy minister Alexander Novak said, according to Reuters.

Russian President Vladimir Putin also said Friday his country does not support runaway oil prices, a sign that the world’s largest energy producer was prepared to ramp up production soon.

“We’re not interested in an endless rise in the price of energy and oil,” Putin said in St. Petersburg on Friday. “I would say we’re perfectly happy with $60 a barrel. Whatever is above that can lead to certain problems for consumers, which also isn’t good for producers.”

The Russian leader echoed previous comments made by Iranian officials, who indicated that a range of $60 to $65 a barrel was fair market value for crude. The Saudis, meanwhile, were said to be targeting prices above $80 a barrel.

OPEC and its allies are planning to gather in their Vienna headquarters June 22 to discuss a new output deal. Output will most likely increase, though the details of the production rise remain unclear.

Oil Prices Sink

U.S. West Texas Intermediate (WTI) futures plunged 4.2% to $67.70 a barrel, the biggest fall since June 2017. The contract settled at worst level in over three weeks.

Brent crude fell 3.1% to $76.39 a barrel, its lowest since May 8. The international futures benchmark traded above $80 a barrel last week for the first time since 2014.

Energy shares were dragged along for the ride, as the sector fell 2.6%. Dow industrials Chevron Corp and Exxon Mobil Corp fell 3.5% and 1.9%, respectively.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 463 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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Commodities

Brent Crude Jumps to $80 a Barrel Amid Geopolitical Fears

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Fears over supply disruptions in the Middle East drove crude prices higher on Thursday, with Brent futures reaching their best levels since November 2014.

Oil Prices Trek Higher

Global energy markets traded sharply higher on Thursday, with Brent crude topping $80 a barrel for the first time in three-and-a-half years. The international futures benchmark, which trades on London’s ICE Futures Exchange, reached a high of $80.33 a barrel for its July contract. That represents a gain of 1.3% from the previous close.

U.S. West Texas Intermediate (WTI) futures also gained and reached a peak of $70.30 a barrel on the New York Mercantile Exchange. Prices were up roughly 0.8% from the previous day.

Oil prices have gained between 8% and 12% over the past month. As a result, energy stocks have surged more than 8% over the same period, far outpacing the broader equity markets in terms of gains.

Energy companies have also been responsible for the bulk of Wall Street’s earnings growth for the most recent quarter. According to FactSet, a financial research firm, energy, materials and technology were the biggest contributors to Q1 earnings and revenue growth.

Geopolitics Sway Commodities

Investors are becoming convinced that President Trump’s exit from the Iran nuclear accord will disrupt oil exports from the Persian Gulf. America’s exit from the agreement restores wide-ranging sanctions on the Islamic Republic, including limits on how much crude it can ship beyond its borders. Combined with record compliance from OPEC and its allies on limiting crude supplies, oil prices look poised to continue higher.

However, not everyone is convinced that sanctioning Iran will prop up crude prices long-term, largely because China and Europe still support the nuclear accord. Some analysts believe that Iran sanctions will wipe 1 million crude barrels per day from the global market. Others say the impact will limited to fewer than 500,000 barrels per day.

Iran is a member of the Saudi-led Organization of the Petroleum Exporting Countries (OPEC), but has expressed diverging views about how oil should be priced. The Iranians are comfortable with $65 a barrel oil while Saudi Arabia is targeting a price point of $80 and beyond.

By reapplying sanctions on Iran, the Trump administration has cost companies like Boeing and Airbus tens of billions of dollars in contracts. France’s Total announced Wednesday it may scrap a multi-billion-dollar gas project in Iran if it could not circumnavigate U.S. sanctions.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 463 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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