JPMorgan Upgrades Century Aluminum, Says Capacity Boost Should Pay Off In 2019

President Donald Trump and his administration's tariff on imported steel from all countries except Canada and Mexico emphasizes the bullish case for Century Aluminum Co CENX, according to JPMorgan.

The Analyst

JPMorgan's Michael Gambardella upgraded Century Aluminum's stock rating from Neutral to Overweight with a price target lifted from $18 to $29.

The Thesis

Trump's proposed 10-percent tariff on imported aluminum has already prompted Century Aluminum to invest in a Kentucky plant and move from 40 percent of capacity to 100 percent. 

Century is making plans to restart three idled potlines at its Hawesville smelter, each of which has a 50kt capacity, Gambardella said in the upgrade note. The incremental annual EBITDA contribution from these three idled pot lines is estimated to be $75 million.

JPMorgan is revising its 2018 earnings per share estimates from $1.28 to $1.08 due to the associated costs of bringing capacity back online. The impact of the investments in 2018 should be apparent in 2019, when the company is now expected to earn $2.57 per share, up from a prior estimate of $2.45 per share, Gambardella said. 

The analyst's revised $29 price target is based on a 7.2x multiple on 2019 EB/EBITDA. This is a more appropriate valuation metric as it "captures the company's earnings potential from restarting Hawesville" compared to the prior price target, which was based on 2018E EBITDA, Gambardella said. 

Price Action

Century Aluminum shares were plunging 5 percent to $20.50 Wednesday afternoon. 

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