What happened
Three Wall Street analysts have upgraded Alcoa (AA +8.06%) stock.
The month of March began with an upgrade from Goldman Sachs, which posited a $32 share price for Alcoa based on its expectation that aluminum prices will rise from $2,300 to $2,500 to $2,750 per ton over the next three years. Last week, Deutsche Bank suggested that even if aluminum costs only $2,145 a ton this year, and $2,050 next year, that should be worth $36 a share to Alcoa. And today, we have yet another upgrade, from Morgan Stanley -- and this analyst thinks Alcoa could be worth $43 a share.
Alcoa stock is up 11% as of 11 a.m. EDT in response.
Image source: Getty Images.
So what
As Morgan Stanley explains in a note covered on TheFly.com today, Alcoa stock is currently trading for just four times its expected 2022 enterprise value to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio -- but historically, the stock has traded for closer to 7.5 times forward EBITDA.
This current valuation, says the analyst, is "well below its historical average." And given Morgan Stanley's belief that aluminum is more important to global "decarbonization" policies than copper, the analyst is shifting its focus among metals stocks to emphasize Alcoa over any copper miners for example -- and is giving Alcoa shares an overweight rating.
Now what
Is Morgan Stanley right about this? Are Goldman and Deutsche right, too?
It's hard to say for sure, but consider that Alcoa managed to generate $41 million in positive free cash flow last year's recession, and that analysts on average forecast the company will grow that number nearly tenfold this year (to $394 million, according to data from S&P Global Market Intelligence). Such a gusher of free cash flow would value Alcoa stock at just 14.3 times this year's cash profits, and probably lift the company's P/E ratio into positive territory as well.
I kind of suspect that would be good news for the stock.
