Despite the strong jobs numbers for April, the overall economic outlook heading into the second half of the year remains grim. Against a backdrop of increased interest rates and recent bank failures, the odds of a recession at the end of this year are up to 64%. It's an environment almost designed to keep investors jittery – and looking for ‘recession free' zones.
In a recent report from JPMorgan, analyst Bill Peterson sees such a head start in the aluminum sector. Peterson takes a deep dive into the complexities of aluminum production and products, and finds that the sector offers a number of advantages that provide long-term support even in a downturn.
“The light weight and recyclability of aluminum means it will play a key role in the transition to a green economy… jp morgan's Commodities Research Team sees aluminum demand in EVs, wind and solar growing from around 2.4Mt in 2020 to 3.8Mt by 2025 represents a ~10% CAGR, which we think has significant upside potential on accelerated adoption of EVs based on IHS forecasts of 23% and 45% penetration by 2025 and 2030, respectively,” Peterson said. Explained.
Peterson is not only analyzing the aluminum industry as a whole, but he's also fingering two stocks he sees as winners. In fact, he's forecasting more than 40% growth potential for both of them. According to tiprankAs a leading source of analyst insight and research, these stocks also have significant double-digit upside potential as assessed by other analysts in the sector. here are the details.
Constellium SE ,CSTM,
We'll start with Constellium, a Paris-based global industrial leader with a strong position in the manufacturing of aluminum products. The company also works on the development of new uses for aluminum, and is a pioneer in working with recycled aluminum metal. Constellium is known for its advanced alloys and engineering, and its aluminum products are found in a wide variety of applications, from simple soda cans to aircraft, cars and packaging.
One number would give the scale of Constellium's operations and its presence in the global metals market: 8.1 billion. In euros, this was the firm's total revenue in 2022. This number was over $8.5 billion in US currency, and marked a 17% year-over-year increase.
The company's first quarter revenue came in at 1.96 billion euros, or US$2.1 billion; While down slightly by 1% year-on-year, the figure beat forecasts by 140 million euros. On the bottom line, GAAP EPS was reported as 14 euro cents, which missed forecasts of 22 cents.
Of interest to investors, Constellium generated 34 million euros in cash from operations in the quarter. Spending 68 million euros on property, plant and equipment resulted in a 34 million loss in the firm's free cash flow — exactly the kind of capital spending it expects to bring rewards later. Management is guiding to 2023 free cash flow of over EUR 125 million.
In Peterson's view, the company's position in an essential industrial location, along with its potential for cash generation, are key points. He writes, “In our view Constellium has the most upside potential among our downstream coverages, as we like the combination of end-market exposure, which could help weather the downturn in aerospace, as well as strong, Provides long-term growth fundamentals as well. In packaging and auto. Strong FCF generation and pricing power, which have proven resilient through the cycle, are another plus. Given its solid FCF generation and improved balance sheet, its ~ A modest premium to the 6x historical average is warranted, which should enable the company to start delivering shareholder returns in 1H24.
The JP Morgan analyst uses these comments to support his Overweight (i.e. Buy) rating on the stock, while his US$24 price target implies the stock will soar 55% over the coming year. (To see Peterson's track record, Click here,
In total, this European industrial firm has 5 recent analyst reviews from Wall Street, and they are unanimously positive and give CSTM its Strong Buy consensus rating. Shares are selling for $15.46 and have an average price target of $20.40 for 32% upside potential over the next 12 months. (Look CSTM Stock Forecast,
Alcoa Corporation ,Come,
The next stock JPMorgan's Bill Peterson is betting on is Pittsburgh-based company Alcoa, which has long been a major player on the world's aluminum scene. Alcoa produces high-end primary aluminum, fabricated aluminum and alumina products and markets and distributes them around the world. The company works with global clients in a wide range of industries, from household appliances and cookware to commonplaces such as cars and bicycles, but also in aerospace and automobiles.
A number of mounting economic headwinds have plagued Alcoa in recent months, including a wicked combination of stubborn inflation, high interest rates and disrupted supply chains that work together to drive up the cost of production. However, the company has pushed back by showing that it can ‘go green', tackling social and political winds while supplying quality products.
Alcoa is doing this by reducing its carbon footprint compared to traditional aluminum producers. The company's Sustana product lines – in low-carbon aluminum, low-carbon alumina and recycled aluminum – drive significant improvements in carbon utilization. The EcoDura line contains at least 50% recycled content, while the carbon footprint of the EcoLum low-carbon aluminum line is 3 times better than the industry average.
Alcoa has achieved this by starting with a base in foundries. The company's proprietary Alesis smelting technology is the first carbon-free smelting technology in the global aluminum industry. Using this technology, Alcoa can smelt aluminum alloys while emitting only oxygen as a gaseous byproduct.
None of this comes cheap. Alcoa's 1Q23 results showed a top line of $2.67 billion, skating $90 million under forecasts and down 19% year-over-year. The bottom line was the non-GAAP EPS figure was a net loss at 23 cents per share, as Wall Street had expected. At the same time, the company reported a significant amount of assets – more than $1.1 billion in liquid assets on hand. With those deep pockets, Alcoa is confident it can weather an economic storm.
What this means for jpm's Peterson is clear from his comments on the stock: He's bullish here, and isn't shy about saying so.
Given supply constraints and the commodity's strong secular growth trends, our outlook hinges on a positive aluminum price outlook, which could help drive shareholder returns and future growth initiatives. The company has systematically improved its pension-related cash funding and has no near-term debt obligations, which positions it well to weather the downturn,” Peterson said.
“Lastly,” said the analyst, “we believe Alcoa is also well positioned in the energy transition to drive increased aluminum demand, in addition to the ‘greening' of the commodity with the launch of the low-carbon Sustana product line. The outlook also looks promising for its proprietary, zero-carbon lysis smelting technology, which eliminates all Scope 1 emissions associated with aluminum smelting, instead emitting pure oxygen as a byproduct.
To this end, Peterson has set an Overweight (i.e. Buy) rating on Alcoa shares with a $54 price target that suggests ~47% share gains by year-end.
What do the rest of the Street think? Given the consensus breakdown, other analysts' opinions are more spread out. 4 Buy, 3 Hold and 1 Sell add up to a moderate buy consensus. Furthermore, the $48.25 average price target indicates a solid 31% upside potential. (Look Alcoa Stock Forecast,
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disclaimer: The views expressed in this article are those of select analysts only. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.