What happened
The stock price of global aluminum producer Alcoa Corporation (AA) nearly doubled in 2017, advancing an incredible 91%. This massive yearly gain was punctuated by a roughly 30% advance in the final month of the year. That December move highlights an important fact about Alcoa, but can hide a big change in 2016 that's still shaping the fundamentals of the business.
So what
At its core, Alcoa is a commodity company that operates across the aluminum value chain. To put it simply, the price of aluminum has a big impact on its top and bottom lines. With aluminum prices rallying through most of 2017, it's no surprise that investor sentiment helped push the stock of one of the world's largest aluminum companies higher. A huge aluminum rally in December, meanwhile, drove its shares even higher as investors looked to benefit from aluminum's rise.
Image source: Getty Images.
There's more to this story than just investor sentiment, though. Higher commodity prices helped to propel Alcoa's financial results as well as its stock price. For example, management upped the company's full-year adjusted EBITDA guidance in October, raising the range from roughy $2.15 billion to around $2.4 billion. It specifically highlighted improving aluminum prices and demand when it announced solid third-quarter revenue and adjusted earnings. Strong financial results also allowed an increase in its cash balance by 30% through the first nine months of the year. Financially speaking, 2017 was a pretty good year for Alcoa and higher commodity prices were a key factor.
Commodity prices don't paint the whole picture, either. That's because last year was the first full year that Alcoa operated as a stand-alone business following its breakup with specialty parts maker Arconic (HWM -0.09%). That separation took place in late 2016. Prior to the breakup, many market watchers believed that Arconic was the better investment opportunity because of its focus on specialty parts, which allow it to largely avoid the volatility often associated with commodity markets. For reference, Arconic's shares advanced about 45% in 2017.
The strong aluminum market, coupled with continued progress in streamlining and strengthening its business, proved that Alcoa was worth more than investors gave it credit for when the two companies split. The material increase in cash is one example of the progress being made, but so, too, are the ongoing efforts to fine-tune the company's assets. For example, it announced in December that it would be permanently closing one facility and selling another. Earlier in the year, it announced plans to reopen a facility, so it's not just about cutting here -- Alcoa is working to get the asset mix right.
AA cash and equivalents (quarterly) data by YCharts.
Rising commodity prices gave Alcoa additional breathing room, but it didn't change the company's direction. It's easy to lose sight of the improvement in its fundamentals when commodity prices are moving dramatically higher. But those fundamental improvements are, in my opinion, just as big a story here.
Now what
When you look at Alcoa, you need to take a deep breath. Often, volatile commodity prices will keep driving the stock's ups and downs. As a commodity producer, there's no way around that fact. So if you have a positive outlook for aluminum, Alcoa should be of interest to you.
That said, after such a large price advance, the shares aren't nearly as cheap as they were after the split from Arconic. I myself wouldn't go out and buy Alcoa's stock today. To management's credit, however, the company has put the upswing in the aluminum market to good use by continuing to improve its business. If you're looking for an aluminum investment, Alcoa is truly getting better with time. For some investors, that fact could give it the edge over its competitors.
