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Why Alcoa Stock Just Popped

By Rich Smith - Mar 3, 2021 at 11:25AM

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Goldman Sachs spins on a dime to upgrade the aluminum stock.

What happened

Alcoa (AA) stock moved higher in Wednesday morning trading -- up 6.2% as of 10:15 a.m. EST -- after investment banker Goldman Sachs pulled a complete 180, opinion-wise, on the aluminum metals giant.

In an upgrade today, Goldman reversed its opinion from sell to buy, and added $13 to its price target on Alcoa shares, which it says should hit $32 within a year.

Solid rolls of aluminum stacked up under a blue sky

Image source: Getty Images.

So what

Despite reporting negative earnings when calculated according to generally accepted accounting principles (GAAP) for two years running, Alcoa has generated positive free cash flow from its business in each of the past four years. Nevertheless, up until today, Goldman worried that Alcoa was producing "weaker FCF generation relative to peers," reports today, and feared "the higher-cost nature of AA's aluminum assets relative to its bauxite/alumina portfolio" would continue to be a drag on the stock.

Today, however, Goldman forecasts that aluminum prices will rise from $2,300 to $2,500 to $2,750 per ton over the next three years -- well ahead of what other analysts are predicting.

Now what

Now what does that mean for Alcoa going forward? Higher aluminum prices imply more free cash flow for Alcoa, rather than "weaker FCF generation relative to peers." And with extra cash to work with, Goldman anticipates that deleveraging will accelerate. That means Alcoa, which at last report had $1.6 billion in cash on its balance sheet, but $2.6 billion in debt, should be able to whittle away at its debt load and bring those numbers more into balance.

Goldman's a fan of that trend, and today, other investors seem to agree.

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