On Monday, Alcoa (AA) traded down 7% which is believed to reflect a few factors including the downgrade and price target cut by Deutsche Bank from “hold” to “buy”, the price target cut by Morgan Stanley, the worries of American Airlines bankruptcy, as well as further concern over global debt levels.
Deutsche Bank downgraded Alcoa’s rating to “hold” from “buy” and adjusted their price target to $14 from $20. The reasons for the downgrade is based on the high leverage of the company, recent declines in metal prices and concern over the demand for industrial metals with uncertainty in Greece and a slowdown in Emerging Market growth. Morgan Stanley cut the price target on Alcoa from $22 to $13, as well as downgrading AA competitors due to risks associated with the slowing of the global economy. The bankruptcy worries for American Airlines may be affecting Alcoa’s stock price due to the increasing use of aluminum as a light-weight and efficient substitute for steel in the production of airplanes. Alcoa has significant exposure to the Boeing Company, which signed a deal over the summer with American Airlines for the production of 200 narrowbody airplanes. The fear of bankruptcy may disrupt the order for Boeing, which will in turn hurt the demand for aluminum from Alcoa.
Going forward, the dismal economic outlook will continue to suppress the demand and more importantly the prices for aluminum. At this point, the prices of aluminum are already below its average marginal cost of production which is close to $2,500 per ton. This leads us to believe that Alcoa will continue to have a tough time increasing revenues and earnings going forward. Alcoa announces 3Q11 Earnings on October 11th, which will uncover many implications about the future of demand and earnings going forward. Our group will continue to evaluate in the next few days whether or not we believe it is in our best interest to maintain our position through the earnings release, as we expect a large revision in the company outlook for 4Q11 and 2012.