Morgan Stanley Calls Kaiser Aluminum 'A Play On Rising Use Of Aluminum,' Starts At Overweight

In a report published Tuesday, Morgan Stanley analysts initiated coverage of Kaiser Aluminum Corp KALU with an Overweight rating and a price target of $95. Kaiser is a leading player in the aluminum downstream segment and is poised for robust long-term growth. The company's high margins are driven by its presence in the aerospace market and the high growth automotive extrusions market. In the report Morgan Stanley noted, "Aluminum downstream players making value-add products (for packaging, automotive and aerospace markets) face an attractive landscape due to solid demand growth with barriers to entry. Further, the 60% YTD decline in aluminum premiums should boost earnings. Lower aluminum prices should also reduce incentive for consumers to look for substitute material, helping demand growth." Kaiser's growth is expected to be driven by declining aluminum prices, robust free cash flows and sustainable high margins. "We like the company's end market exposure (~60% of revenues from aerospace & automotive), geographic focus (>90% revenues from the US), 9% EBITDA CAGR in 2015-19e, 3.5% yield on 2015e FCF, share buyback program, and strong balance sheet," the analysts added. The company's current stock valuation does not fully reflect its growth prospects. "We think the sustainability of KALU's profit margins (on strong demand, barriers to entry, & cost reduction) and LT earnings growth are not appreciated, and will drive the stock's re-rating," the analysts commented.