Bellwether Alcoa Quietly Rises After Blow Out Quarter

Alcoa: The Bellwether Is Back  

Alcoa (NYSE: AA) was long the bellwether for the market but something changed. The product, the business, and the stock fell out of favor under the influence of multiple factors that have left it the undervalued company it is today. But that was then. This is now. Now Alcoa is in the best shape it's been in for years and demand for aluminum is on the rise. And not only that, it is on the rise in all end markets and driven by low inventory and high demand throughout the supply chain. If there ever was a time to pay attention to Alcoa's results now is it. 

Alcoa Beats, Guides Higher 

Alcoa was expected to have a double-digit quarter, to begin with, so the fact it beat the consensus by 910 basis points is all the more stunning. The $2.87 billion in revenue is up 20% sequentially and 20.6% YOY on the combination of rising demand and higher prices. The prices for alumina alone are up 25% over the last six months and at a three-year high. Because alumina is the leading ingredient to aluminum we can expect the cost of all aluminum goods to rise significantly but we digress. The takeaway is that prices are rising under the pressure of strong demand that we do not see abating for several quarters if not years. The RV industry alone is forecasting it won't catch up with demand until late 2022. 

Notably, the Q1 revenue is the 2nd highest since 2018, and 2018 was a record. In our view, this record will be beaten within the next two quarters. Moving down the report, the company was able to leverage the volume and price increases to drive significant gains on the bottom line. the GAAP $0.93 in earnings beat the consensus by $0.37 while the $0.79 in adjusted EPS beat by $0.33. 

Company execs also issued a very favorable outlook for the year driven by a double-digit increase in demand for value-added products. Based on the upcoming comps and outlook for sequential growth, we are expecting to see Alcoa's revenue grow 35% or more in 2021 and for the company to sustain the gains if not grow again in 2022. And that is without the help of recent divestitures. 

The Technical Outlook: Alcoa Is Heading To $60

With the business back to 2018 levels and the outlook for growth robust, it makes sense to think shares of AA should be trading near their 2018 levels as well. The bad news is they aren't, the good news is it looks like they will be soon. The Q1 report spurred the price action to break out of a consolidation range and set a new high with bullish signals in the indicators. Both MACD and stochastic are bullish and moving higher suggesting rising bullishness and plenty of room for the market to run. The next target for major resistance is up at the $40 level or about 14% upside and that may only be the beginning. If the second half of the year unfolds as we think it will this stock should break through $40 on its way to $50 and $60 or 43% and 71% upside from today's prices.