BofA Downgrades Alcoa Shares To Neutral Following Recent Upside

BoFA Merrill Lynch's Timna Tanners downgraded the rating for Alcoa Inc (NYSE: AA) from Buy to Neutral, while reducing the price objective from $12 to $10.50.

Analyst Timna Tanners said that Alcoa's shares have been surprisingly resilient despite a one-third decline in alumina prices since June 2015, a worsening outlook for aerospace build rates and a high pension liability that was disclosed recently.

Although the aerospace cycle is expected to support Alcoa's specialty metals portfolio and the eventual isothermal forge ramp up, other elements of the investment thesis in the company have worsened, Tanners noted.

The near 20 percent y/y decline in January in the US heavy duty truck orders may have a negative impact on Alcoa's Transportation & Construction Solutions segment. Tanners added that although aluminum and alumina prices have bounced back from their lows, the oversupply from China may limit upside.

Tanners expects Alcoa's plans to split its upstream production and downstream processing to have a long-term positive impact. She added, however, that the whole process may have management distracted and upstream productions may be unable to support any debt.

Alcoa's shares have gained 43 percent since mid-January and fully reflect the expected benefit from the growth in the aerospace segment, the analyst commented.