Is It Too Late To Consider Alcoa (AA) After Its 77% One-Year Share Price Surge?

• If you are wondering whether Alcoa's recent share price puts it at a premium or still leaves room for value, you are not alone. This article is built to help you frame that question clearly.
• Alcoa's stock recently closed at US$63.56, with returns of 16.9% over 7 days, 45.2% over 30 days, 12.4% year to date, 77.6% over 1 year, 24.4% over 3 years and 165.3% over 5 years. This naturally raises questions about how the current price lines up with fundamentals.
• These moves have unfolded as investors continue to track sector wide developments in metals and materials, focusing on how companies like Alcoa are positioned within their industry. While this article is not tied to any specific short term event, it aims to give you a more grounded reference point for thinking about valuation through cycles.
• On Simply Wall St's valuation checks, Alcoa scores 5 out of 6, which suggests there is more to unpack about how the market is currently pricing the business. Next we will walk through the standard valuation approaches investors often use on Alcoa, and then finish with a way of thinking about value that many readers may find even more useful.

Find out why Alcoa's 77.6% return over the last year is lagging behind its peers.

Approach 1: Alcoa Discounted Cash Flow (DCF) Analysis

A DCF model takes expected future cash flows, then discounts them back to today to estimate what the whole business might be worth right now. It is essentially asking what those future dollars are worth in today’s terms.

For Alcoa, the latest twelve month Free Cash Flow is about $444.8 million. Analysts have provided projections out to 2028, with Simply Wall St extending those out to 2035 using its 2 Stage Free Cash Flow to Equity model. In that set of forecasts, projected Free Cash Flow for 2035 is about $4.3b, all expressed in $.

When those cash flows are discounted back to today, the model arrives at an estimated intrinsic value of about $201.62 per share. Against a recent share price of US$63.56, the model output implies the stock is about 68.5% undervalued on these cash flow assumptions.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Alcoa is undervalued by 68.5%. Track this in your watchlist or portfolio, or discover 875 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Alcoa.

Approach 2: Alcoa Price vs Earnings

For a profitable business, the P/E ratio is a useful yardstick because it ties what you pay directly to the earnings the company is generating today. Investors usually accept a higher P/E when they expect stronger growth or see lower risk, and a lower P/E when growth expectations or perceived risks are higher.

Alcoa currently trades on a P/E of 14.71x. That sits below the Metals and Mining industry average of 26.30x and below the peer group average of 29.41x. On a simple comparison, the stock is priced at a lower earnings multiple than many companies in its space.

Simply Wall St also calculates a proprietary “Fair Ratio” for Alcoa of 16.81x. This is an estimate of what Alcoa’s P/E might be if the market priced in factors like its earnings growth profile, industry, profit margins, market cap and key risks. Because it blends these company specific inputs, the Fair Ratio can be more informative than a broad peer or industry average. When compared with this Fair Ratio, Alcoa’s current P/E of 14.71x is lower, which indicates the shares are undervalued on this metric.

Result: UNDERVALUED

P/E ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1447 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Alcoa Narrative

Earlier we mentioned that there is an even better way to understand valuation. On Simply Wall St you can use Narratives, where you write a short story about Alcoa that links your view on its business to a forecast for revenue, earnings and margins, and then to a Fair Value that you can compare with the current share price. This all happens within an easy Community tool that updates automatically when new information like news or earnings arrives. One investor might build a more cautious Alcoa Narrative around lower long term demand, margin pressure and a Fair Value closer to US$33.55. Another might focus on decarbonization, new projects and the latest Fair Value of about US$45.42. This gives you a clear, personalised way to decide how the current price lines up with your own assumptions.

Do you think there's more to the story for Alcoa? Head over to our Community to see what others are saying!

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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