Gabelli research analyst Justin Bergner discusses his top stock pick of 2017: Alcoa (NYSE: AA).
Gabelli Research Best Ideas 2017: Alcoa Corporation (AA)
We are recommending Alcoa as our best idea for 2017.
Alcoa is an $8.5B revenue alumina and aluminum company based in New York, NY.
Following its spin out from old Alcoa, Alcoa Upstream has 183 million shares outstanding, closed at 30 dollars per share for an equity market cap of 5.5 billion dollars, Most of Alcoa’s businesses are commodity businesses, but Alcoa has the advantage of having low cost assets across the commodity businesses in which it competes. On the global cost curve, Alcoa is first-quartile in mined bauxite, first quarter in refined alumina, and second quarter in primary aluminum. It can make money in tough markets, like at present, and enjoy better times when conditions improve. Alcoa has substantial hidden assets in its portfolio that are heavily overlooked by the market. Alcoa’s energy assets that used to power smelters but now sell onto the open market are valued added cast house assets are worth upwards of $1.75B, or ~$10 per share, and we believe the market is not capture a large portion of this value. Moreover, depreciation is running substantially ahead of capex, depressing earnings relative to EBITDA and cash flow, EBITDA and cash flow being the key driver of value for shareholders.
Relative to our 2017 PMV of $42, Alcoa trades at a substantial $12 discount, reflecting overlooked assets and good cash flow. A catalyst may well occur in the coming years to close that discount, namely a potential share merger with another aluminum company, such as Rio Tinto’s aluminum business, or South 32. The spin of Alcoa Upstream from old Alcoa was an enabling event for a future catalyst. We estimate EPS can grow from $0.75 in 2017 to $1.10 in 2018 and $1.55 in 2019 and that our PMV of $42 in 2017 can scale to the high-$40s by 201, making Alcoa an attractive stock to own.