What happened
Shares in bauxite, alumina, and aluminum producer Alcoa (AA 1.21%) were down around 10% by midday Wednesday. The move comes after its steel manufacturing peer, Nucor (NUE 2.02%), announced disappointing guidance for its third quarter. Steel and aluminum are replaceable with each other and operate in very similar end markets, so Nucor's warning is a salutary reminder that Alcoa also faces difficulties in 2022.
NYSE: AA
Key Data Points
Nucor's updated guidance for the third quarter calls for earnings in the range of $6.30 to $6.40 -- somewhat short of the analyst consensus for $7.59. Nucor's management cited "metal margin contraction and reduced shipping volumes particularly at our sheet and plate mills" and said its steel mills earnings would be "considerably lower" on a sequential basis. Management also said its raw materials earnings would be flat on a sequential basis, after previously forecasting an improvement.
So what
In a sense, the move is hardly surprising. Steel reinforcing bar and hot-rolled coil steel prices have been on a downward trend since the spring, and the price of aluminum has been in step. As such, Nucor's warning is a strong indication that earnings estimates for Alcoa need to be reduced.
Now what
Given the decline in aluminum prices it makes sense to price in lower earnings for Alcoa in 2022, and that's what the market is doing right now by pricing the stock lower. At some point the stock could become an outstanding value. However, it might make more sense to wait until there's some stabilization in the price of aluminum before buying Alcoa stock.
