Is Alcoa A Buy After Strong Q2 Results And More Share Buybacks?

Back in the day, as in pre-2013, aluminum manufacturer Alcoa NYSE: AA made financial headlines every quarter as the first Dow component to report earnings. In some ways, it served as a bellwether for what investors could expect in every earnings season. I was a financial journalist throughout the first decade of the 2000s, and recall the anticipation of Alcoa’s report every three months. 

But things change. Industries go in and out of prominence, and Alcoa was booted from the Dow and replaced with Nike NYSE: NKE (yes, that was a silly little clothing pun). The athletic apparel maker remains a Dow component to this day. 

The move made sense, as it turned out. Alcoa is no longer even a large cap, and as such is tracked in the S&P 400 midcap index, rather than the large-cap S&P 500.

Alcoa’s vertically integrated operations include alumina refining and bauxite mining, in addition to manufacturing primary aluminum. It’s the world’s biggest miner of bauxite, which is used to produce aluminum, as well as other industrial products such as chemicals and cement. 

As you might expect, Alcoa’s revenue and earnings profits are closely linked to current commodity prices in its supply chain.

So how has the company been faring, in an era of supply-chain disruptions and high commodity prices? 

Alcoa reported its second quarter on July 20, and shares popped 6.36% that week as the company topped revenue views, as you can see on MarketBeat’s earnings data page. 

Diluted earnings per share of $2.95 topped Wall Street’s expectations. Non-GAAP earnings came in at $2.67 per share.

Highlights of the report included:

• Revenue increased sequentially to $3.6 billion, primarily due to improved shipments and higher pricing
• Net income increased sequentially to $549 million, or $2.95 per share
• Adjusted net income of $496 million, or $2.67 per share
• Cash balance of $1.6 billion at quarter end
• Strong cash flows; increased capital returns with $275 million of common stock repurchased and $19 million in cash dividends
• Improvement in the company’s revolving credit facility with terms that provide more flexibility to execute on Alcoa’s strategies

The company also said outbound transportation logistics improved in the second quarter, with greater availability of railcars and vessels, positively influencing alumina and aluminum shipments. 

Additional Share Buybacks

“We had a strong first half of 2022 with nearly $2 billion in Adjusted EBITDA and cash flows that have enabled more buybacks under our existing stock repurchase program as well as continued quarterly dividend payments,” said Alcoa president and CEO Roy Harvey. “We have returned more than $380 million so far this year to our investors, and today we announced an additional $500 million authorization for future stock repurchases.”

The company’s 12-month dividend yield is 0.81%, not exactly in the category of dividend aristocrat. However, its buyback yield stands at 5.62%, for a total yield to shareholders of 6.43%. That’s not a bad return, and could be an incentive to investors during a time of broad market and economic uncertainty. 

In a refrain that’s common throughout all industries, the company said that on July 1, it had partially curtailed operations at an Indiana smelter “due to operational challenges, which stem from workforce shortages in the region.”

Does Wall Street See Upside? 

So what does Wall Street believe about Alcoa’s future? According to MarketBeat analyst data, there is a “hold” rating on the stock, with a price target of $78.64. That represents upside of 65.48%, which sounds like a pretty good gain for a stock considered a “hold.” 

If you’re looking for single stocks to add to your portfolio, avoid gravitating toward old-school sentimental favorites, such as former Dow components. That doesn’t mean Alcoa can’t be a winner in your portfolio at some point, but Alcoa is currently mired in a correction, with a year-to-date decline of 16.45%. It’s also showing declines in shorter-term rolling time frames. 

For that reason, this stock probably shouldn’t be at the top of a “buy” list at the moment, but as it eventually rallies higher (and it will, particularly as the market rebounds), it could be a watch list candidate.