Aluminum And Steel- Boom Times For Cyclicals

Copper, Metal, Modern, Design, Architecture, Metallic

With the U.S. economy entering boom times, cyclical industries have been outperforming.

Alcoa (AA), one of the world’s largest aluminum producers, stands to benefit. Its operations include bauxite mining (aluminum ore), alumina refining (for smelting), and primary aluminum manufacturing. With aluminum prices at nine-year highs, Alcoa is expected to see significantly higher free cash flow going forward.

That's a big reason for the recent strength, but another is the anticipated increase in automotive demand for aluminum — after an 11% sequential improvement in sales of value-added aluminum products, Alcoa saw an additional 13% volume growth in Q4, particularly in the auto sector. (Aluminum is second to only steel as the most used material in vehicles.)

After a 15% drop in 2020, the National Automobile Dealer Association forecasts 7% higher auto sales for 2021, which many analysts think is conservative. Moreover, global aluminum consumption this year is expected to increase 7% — the fastest rate since 2014 — based on fiscal stimulus and central bank looseness.

On the financial front, while revenue was 2% lower in Q4, Alcoa posted consensus-beating per-share earnings of 26 cents, a huge rebound from the $1.17 per-share loss in Q3. For the current quarter, the top line is expected to increase 11% from a year ago while the bottom line rises to 48 cents (up 85% sequentially).

All in, Alcoa is a cyclical play but the upside is big if the economic recovery continues. Add to that a possible dividend reinstatement within a year and we like what we see. With support down in the mid 20s, we’re OK starting a position in AA here or on pullbacks of a point or two.

Meanwhile, steel is one of the strongest-performing industrial metals right now, thanks in part to lingering supply shortages that popped up with the pandemic last year.

Automakers and aerospace parts manufacturers have had to scramble to secure steel supplies, with inventories at their lowest levels since 2004 and hot-rolled steel prices recently hitting highs not seen in decades.

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