Should You Buy Alcoa Corp (NYSE: AA) Now?

in INVESTING IDEAS by

Alcoa Corp (NYSE: AA), a materials company with a market capitalization of $11.2 billion, saw its share price increase by 33.6% over the last month. As a large-cap stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. However, could shares still be trading at a relatively cheap price? Let’s take a look at Alcoa’s outlook and value based on its most recent financial data to see if there are any catalysts for a price change.


What Is Alcoa Worth?

Welcoming news for investors, Alcoa is still trading at a fairly cheap price. According to our 5 valuation analyses, the intrinsic value for the stock is $69.41 per share and is currently trading at $60.01 in the market. This means that there is still an opportunity to buy now.

Alcoa Corp Valuation Detail
Analysis Model Fair Value Upside (Downside)
Peer Revenue Multiples $81.37 35.6%
5-yr DCF EBITDA Exit $68.90 14.8%
Peer EBITDA Multiples $87.18 45.3%
5-yr DCF Growth Exit $65.61 9.3%
Peer P/E Multiples $44.02 -26.7%
Average $69.41 15.7%

Click on any of the analyses above to view the latest model with real-time data.

What’s more interesting is that Alcoa’s share price is quite volatile, which gives us more chances to buy since the share price could sink lower (or rise higher) in the future. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.


How Much Growth Will Alcoa Generate?

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company’s future expectations.

Alcoa projected net income chartsource: finbox.io data explorer

With net income expected to grow at an average rate of 14.7% over the next couple years, the future certainly appears bright for Alcoa. It looks like higher cash flows are in the cards for shareholders, which should feed into a higher stock valuation.


Next Steps

While many investors tend to categorize stocks as either value or growth plays, the most successful investors view growth in conjunction with a company’s value. Take legendary investor Peter Lynch for example, who is widely known for popularizing the term growth at a reasonable price (GARP).

GARP is a strategy that combines aspects of both growth and value investing techniques by finding high growth companies that don’t trade at overly high valuations. In the application of this strategy, Lynch achieved 29% annualized returns as the manager of Fidelity’s Magellan Fund from 1977 to 1990. Needless to say the importance of analyzing a company’s fair value in addition to its growth prospects.

Alcoa’s optimistic future growth does not appear to have been fully factored into the current share price with the stock still trading below its intrinsic value. Therefore, it may be a good time to purchase shares or increase your position in the company.

However, if you have not done so already, I highly recommend you complete your research on Alcoa by taking a look at the following:

Efficiency Metrics: return on equity is used to measure the return that a firm generates on the book value of common equity. View Alcoa’s return on equity here.

Risk Metrics: what is Alcoa’s cash ratio which is used to assess a company’s short-term liquidity. View the company’s cash ratio here.

Valuation Metrics: what is Alcoa’s free cash flow yield and how does it compare to its publicly traded peers? This metric measures the amount of free cash flow for each dollar of equity (market capitalization). Analyze the free cash flow yield here.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Expertise: Valuation, financial statement analysis. Matt Hogan is also a co-founder of finbox.io. His expertise is in investment decision making. Prior to finbox.io, Matt worked for an investment banking group providing fairness opinions in connection to stock acquisitions. He spent much of his time building valuation models to help clients determine an asset’s fair value. He believes that these same valuation models should be used by all investors before buying or selling a stock. His work is frequently published at InvestorPlace, Benzinga, ValueWalk, AAII, Barron’s, Seeking Alpha and investing.com. Matt can be reached at matt@finbox.io or at +1 (516) 778-6257.

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