Aerospace Expansion And Packaging Shift Will Support Long Term Aluminum Demand Narrative

Catalysts

About Kaiser Aluminum

Kaiser Aluminum is a North American producer of value added rolled and extruded aluminum products serving aerospace, packaging, general engineering and automotive end markets.

What are the underlying business or industry changes driving this perspective?

• Completion of the Trentwood Phase 7 plate expansion positions Kaiser to capture rising commercial aircraft and defense build rates, which may lift aerospace conversion revenue and support a return to mid to high 20 percent EBITDA margins as volumes normalize.
• Ramp up of the fourth coated line at Warrick and the strategic mix shift away from bare products into higher value coated packaging may expand conversion revenue per pound and structurally improve net margins as start up costs taper off through 2026.
• Persistent supply tightness in North American packaging and growing customer demand for aluminum based food and beverage solutions provide pricing power that may underpin higher EBITDA margins and more resilient earnings across cycles.
• Reshoring driven strength in general engineering and better pull for domestically produced aluminum products in a tariff constrained environment support sustained shipment growth and incremental price realization, benefiting both revenue and operating income.
• Balance sheet deleveraging, improved free cash flow as major growth capex rolls off and discipline around capacity utilization may allow more cash to flow to shareholders while affecting earnings per share through lower interest expense and higher operating leverage.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Kaiser Aluminum's revenue will grow by 9.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.7% today to 4.1% in 3 years time.
• Analysts expect earnings to reach $172.0 million (and earnings per share of $10.58) by about December 2028, up from $85.2 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 13.4x on those 2028 earnings, down from 20.9x today. This future PE is lower than the current PE for the US Metals and Mining industry at 24.4x.
• Analysts expect the number of shares outstanding to grow by 0.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.63%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The completion of major growth projects at Trentwood and Warrick, combined with secular growth in aerospace build rates and structurally tight North American packaging supply, could drive sustained volume growth and pricing power. This could lift conversion revenue and EBITDA margins and support a higher share price over time through stronger earnings.
• Reshoring trends and tariff driven preference for domestically produced aluminum may continue to strengthen general engineering and automotive demand. This may allow Kaiser to raise prices and maintain a favorable mix, which would bolster revenue and operating income and could push the valuation higher than today.
• As start-up and outage related inefficiencies fade while new high margin coated packaging and aerospace plate capacity reaches full run rate, the company could move closer to its mid to high 20 percent EBITDA margin target. This could expand net margins and earnings and thereby support multiple expansion rather than a flat share price.
• Improving free cash flow as growth capex winds down, combined with a lower net debt leverage ratio and extended credit facility, may enable increased capital returns to shareholders and lower interest expense. This could enhance earnings per share and make the stock more attractive to long-term investors.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $106.5 for Kaiser Aluminum based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $4.2 billion, earnings will come to $172.0 million, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 9.6%.
  
• Given the current share price of $111.08, the analyst price target of $106.5 is 4.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.