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Alcoa (NYSE:AA) is expected to publish its Q2 2024 results around July 17, reporting on a quarter that saw aluminum prices pick up notably. Alcoa stock has fared well this year, rising by 17% since early January. In comparison, Rio Tinto (NYSE:RIO) stock has declined by 10% over the same period. We expect Alcoa’s revenues to come in at about $2.750 billion, marginally ahead of the consensus estimates of $2.740 billion and up about 2% from last year. We estimate that the company will post a net loss of about -$0.01 per share, slightly better than the consensus and slightly better than last year’s loss. So what are some of the trends that are likely to drive Alcoa’s results?

Alcoa’s production for the quarter is likely to be mixed. On the aluminum front, the company indicated that it would fully curtail production at its 2.2 million metric ton Kwinana Alumina refinery in Western Australia in Q2 onward due to the plant’s age and higher cost structure. This could impact the company’s output going forward. Alcoa has been facing operational challenges at its San Ciprian complex in Spain, which includes an alumina refinery and an aluminum smelter. Alcoa has been looking at a potential sale of the segment. Alcoa’s Alumina production has also seen some headwinds of late, declining 4% sequentially to 2.67 million metric tons in the last quarter on account of lower production from Australian refineries. We could see similar trends in Q2 as well.

That said, price realizations for Aluminum are likely to pick up. Aluminum prices have been rising over the last few months, driven by uncertainty regarding supply given the West’s ban on Russian producers, and hopes that the U.S. Federal Reserve would cut interest rates. Alcoa has also indicated the demand from the automotive and electrical sectors has been strong, with demand from the packaging industry also seeing a recovery. While aluminum prices stood at about $2,390 per ton in early April 2024, they tested highs of over $2,750 per ton in May. Manufacturing activity has also picked up a bit in major economies including the U.S. and China, driving up demand for industrial metals such as aluminum and copper. However, prices have declined a bit to about $2,500 per ton presently, driven by improved production in China where higher rainfall has helped hydropower-dependent smelters boost their aluminum output. However, profitability could be affected by the impact of higher energy costs in the aluminum business, although this could be offset in part by favorable raw material and production costs.

Now AA stock has seen extremely strong gains of 60% from levels of $25 in early January 2021 to around $40 now, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period. However, the increase in AA stock has been far from consistent. Returns for the stock were 159% in 2021, -23% in 2022, and -25% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that AA underperformed the S&P in 2022 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Materials sector including LIN, SCCO, and RIO, and even for the megacap stars GOOG, TSLA, and MSFT.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AA face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

Rising investments in the renewable energy sector including electric vehicles, charging infrastructure, and solar and wind power plants remain secular drivers for aluminum demand. We think that Alcoa has an edge over other aluminum producers given its strong balance sheet and also due to the fact that its facilities are based mainly in the U.S., resulting in lower energy costs compared to European rivals. Alcoa has also been looking to boost its productivity and optimize its assets. While we will be revisiting our price estimate for Alcoa post Q2 earnings, we currently value the stock at $35 per share, which is slightly below the current market price of about $40. See our analysis of Alcoa valuation for a closer look at what’s driving our price estimate for Alcoa and how Alcoa’s valuation compares with peers. Also, see our analysis of Alcoa Revenue for more details on how Alcoa’s revenues are expected to trend.

[1] Returns as of 6/30/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.