Is the bottom in for bellwether Alcoa?

Key Points

• Alcoa had a better-than-expected quarter and is forming a revenue/earnings trough. 
• Q4 and 2024 may be tepid, but results should be steady with margin improvement and profitability returning. 
• Analysts hold the stock and see it trading near the floor; if it rebounds soon, the odds of a sustained rally in 2024 reach near-certain levels. 

Alcoa’s NYSE: AA prominence as a bellwether of the US economy faded over the last decade but should not be discounted. Alumina, aluminum, and the products made from them are leading indicators of the economy and have a story to tell today. 

While Alcoa’s business suffered in 2023 due to deleveraging prices and demand, the company has leaned into operational quality and is on track to rebound over the coming three years. Other economic bellwethers with similar outlooks include FedEx NYSE: FDX and J.B. Hunt Transport Services NASDAQ: JBHT. Both are expected to put in a revenue/earnings trough and rebound in 2024.

The primary takeaway from the Q4 and F2023 results is that a trough in revenue and profitability is forming. Sequential results will stabilize from here on, growth will come back into the picture, and a return to profits is expected. With shares trading near historic lows and the dividend yield near historical highs, a bottom is in play, and a buying opportunity is at hand for this basic materials stock. 

Alcoa has a better-than-expected quarter on solid delivery

Alcoa’s business contracted compared to last year, but that may be the worst news. The $2.6 billion in net revenue contracted by 2.3%, but the decline is far less than in previous quarters and better than expected. The outperformance is slim but offset by margin strength that left the bottom-line result 35% above the Marketbeat.com analysts' consensus. Sequentially, results were flat, with alumina down 1% and aluminum up 2%. 

The margin news is a mixed bag but indicative of improvement and current strength and a pivot point to profits in 2024. The company’s GAAP and operating margin were negative and resulted in cash burn, but the losses and burn were less than expected. 

Regarding EPS, the $0.56 loss was $0.30 better than expected and far less than last quarter and year, while cash burn was less than 30% of the balance YTD. Operationally, the company generated positive cash flow, offset by CAPEX, capital returns, investing activities, and special one-offs that will not be repeated in coming quarters. 

Guidance is also mixed but indicative of stabilization and steady top-line performance in 2024. The company guides the alumina segment to decline modestly on a YOY basis but for increased aluminum production related to smelter restarts and capacity expansion to offset it. The company did not provide specific figures for revenue or earnings. Still, analysts have forecasted a low single-digit decline in the top line, with profitability returning by the end of the year and accelerating in 2025. 

Analysts hold on to Alcoa: Institutions buy it

The analysts' activity is mixed but favors a bottom in the stock price action. The consensus price target fell sharply over the last year but still forecasts a 15% upside, and the low end of the range suggests a floor is in place. The low end of the analysts' range is $25, which B. Riley set in December. It is near the current action and consistent with the lows set at the end of 2023. Assuming no new low targets are forthcoming, the $25 level should provide support again. 

Institutional activity is also consistent with a bottom at these levels. The institutions bought on balance in 2023, buying more than they sold in the first three quarters of the year and selling in Q4. The Q4 balance was only slightly bearish; some institutions bought into the sell-off, and the price action rebounded smartly. The action in Q1 2024 echoes the bullish sentiment, with buying activity more than doubling selling in the first two weeks of the year. Now, price action has retreated to find firm support and is at critical levels. Another rebound at this point would confirm solid sell-side support for this market. 

The technical outlook: Alcoa is at the bottom, but will it fall through? 

The technical picture more than suggests a bottom is in for Alcoa. The question is whether it is a short-term or long-term bottom, which will be answered soon. The market is poised to move lower and retest the critical level over the next few days to two weeks and will provide the next signal. 

A bounce from these levels confirms sell-side support and the bottom; in that scenario, the stock could move sideways until later in the year or begin to rebound now. If not, shares of AA could fall to the $20 level or lower, where they will provide better value. Trading at 98X earnings, the stock is not cheap relative to the 2024 outlook. The valuation falls to a much nicer 11X in 2025, assuming 2024 unfolds as forecast.