2 Aluminum Stocks To Buy, According To Jefferies

Despite potential risks from a trade war, Arconic Inc ARNC and Constellium NV CSTM boast favorable risk-reward profiles, according to Jefferies.

The Analyst

Jefferies' Martin Englert initiated coverage of Arconic with a Buy rating and $23 price target and Constellium with a Buy rating and $14 price target. On the other hand, the analyst initiated coverage of Kaiser Aluminum Corp. KALU  with a Hold rating and $122 price target.

The Thesis

Companies like Arconic and Constellium are positioned to take advantage of the recovery in aerospace and increased utilization of aluminum in autos, Englert said a note.

In Arconic's case, the stock's "depressed" valuation gives the company a good opportunity to allocate its $500 million towards its stock buyback and recent interest from private equity firms adds to the stock's attractiveness. Looking forward to 2019, the company should see aluminum inflationary headwinds subside as costs are passed through and create an earnings tailwind.

Constellium's exposure to the auto sector makes the stock attractive, the analyst said. Specifically, management's positioned the company to grow its high-value auto body sheet capability. This should turn free cash flow positive and help deleverage the balance sheet.

Kaiser Aluminum boasts some of the best financial metrics in the space, including a net debt-to-capital of 13 percent and the highest EBITDA to FCF conversion. At the same time, the conservative capital structure and share repurchase program implies the stock is "most defensive" relative to peers.

Price Action

Shares of Arconic were trading higher by more than 10 percent while Constellium were higher by 2.7 percent. Shares of Kaiser Aluminum were trading lower by 1.2 percent.

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