Alcoa Price Target Cut To $16 By Morgan Stanley: Here's Why

In a report published Monday, Morgan Stanley analyst Paretosh Misra maintained an Overweight rating on Alcoa, Inc. AA, while lowering the price target to $16, following a downward revision in the 2015-2017 EBITDA estimates. "Downward revisions to consensus estimates and depressed metal pricing makes near term rebound in shares challenging but we see drivers in place for a 2H recovery in shares," Misra explained. The analyst believes that there are three key drivers that could lead to a recovery in the share price in 2H. Firstly, there appears to be limited downside risk to the all-in aluminum prices, with prices being at a six-year low at present, including regional premiums. This implies that upstream performance would also be reaching a trough at the current prices. This in turn is expected to help shift investor focus to the higher-multiple earnings from the company's downstream portfolio. Secondly, the analyst expects Alcoa's earnings to bottom in 3Q, before recovering in 4Q. The third driver of share price recovery is likely to be an improved portfolio. "We expect AA valuation to benefit from increased investor focus on AA's high margin value-add product portfolio. Further, the portfolio will be boosted by recent acquisitions related to aerospace products and new capacity investments in automotive. We are forecasting $6-7 bn in aerospace revenues by 2017e," Misra explained. The 2015-2017 earnings, estimates have been lowered to reflect the meaningful decline in premiums.
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