Alcoa (AA) Stock Looks Reasonable With Cash Flow Carrying The Case

Alcoa has delivered a 73.4% return over the past three years, yet the share price has been under pressure more recently and the business is now preparing for a sizeable acquisition. That mix of long term gains, near term share price weakness and fresh capital commitments raises a simple question for you as an investor: Is today’s valuation properly grounded in the cash that Alcoa can generate over time?

• Over the last three years the stock has gained 73.4%, which puts real weight on whether the current market value lines up with the cash the company can produce.
• The planned US$2.6b senior notes to help fund the proposed South32 aluminum assets purchase may reshape Alcoa’s cash flow profile by adding both new operating assets and extra interest costs that future cash generation will need to cover.
• What if you looked at Alcoa through its earnings instead? See what Alcoa's 9.3x P/E says about the price.

The issue now is whether the cash flows implied by Alcoa’s current price of US$44.64 per share are well supported by its underlying business and funding plans.

If you want more ideas beyond Alcoa that still keep the focus on valuation and fundamentals, a focused stock screen can be a useful starting point for research through the 30 high quality undervalued stocks

Is Alcoa a Bargain on Cash Flow?

The Discounted Cash Flow (DCF) model here looks at the cash Alcoa can return to shareholders over time and brings those future dollars back to today. On the latest twelve month view, the business produced free cash flow of about $377.5m, and the projection set assumes this builds into a higher, more settled run rate by the early 2030s rather than fading away.

Those cash flow expectations sit alongside a current share price of $44.64, and the DCF projections put Alcoa's estimated intrinsic value substantially above the current share price. The planned $2.6b senior notes to fund the South32 aluminum assets help explain why the market might be cautious, because the extra interest burden will compete with future free cash flows that the model treats as available to equity holders. That gap is what you are really weighing up here as an investor. Find out what Alcoa could be worth using our Discounted Cash Flow (DCF) estimate.

The Alcoa Narrative: What Would Justify Today's Price?

Simply Wall St Narratives for Alcoa pick up exactly where that valuation puzzle leaves you. They spell out what would need to be true about Alcoa's future growth, profitability and earnings power for the stock to trade meaningfully higher or lower than today. Each narrative on the Community page sets out a fair value as a thesis you can track over time, so you can see how the underlying business either supports or challenges that original view.

One of the top community narratives on Alcoa: 10% undervalued

"Intensifying carbon regulations and rising global initiatives to decarbonize heavy industry threaten to drive up Alcoa's long-term operational and compliance costs..."

Discover why this Narrative puts Alcoa at 10% undervalued.

One more Alcoa check that sits beside the price tag

The figures on Alcoa only tell part of the story, because the people deciding where each dollar goes and how they are rewarded can strongly shape future outcomes. See who runs Alcoa and how they are paid.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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