Tariff Volatility And Recycled Materials Will Erode Primary Aluminum Margins

Key Takeaways

• Rising use of recycled aluminum and competitive lightweight materials, plus global supply growth, threaten Alcoa's long-term demand and the reliability of growth projections.
  
• Ongoing tariff volatility, regulatory pressures, operational bottlenecks, and limited production flexibility could compress margins and elevate future costs.
  
• Decarbonization trends, supply constraints, and sustainable product innovation position Alcoa for stronger pricing, improved margins, and resilient long-term growth amid shifting global demand.

Catalysts

Engages in the bauxite mining, alumina refining, aluminum production, and energy generation business in Australia, Brazil, Canada, Iceland, Norway, Spain, the United States, and internationally.

• Growing adoption of recycled aluminum and substitute lightweight materials in automotive and construction could erode long-term demand growth for primary aluminum, making future revenue growth expectations for Alcoa optimistic and possibly contributing to overvaluation.
  
• Persistent tariff-related market volatility, combined with Alcoa's contractual obligations limiting its ability to flexibly redirect Canadian production, may compress net margins for several quarters, especially if regional price premiums fail to fully offset heightened costs.
  
• Delays in securing new mine approvals in Western Australia could increase operational risk and future production costs if existing reserves are depleted faster than anticipated, potentially weighing on long-term earnings growth.
  
• Stagnation or further decline in aluminum prices due to global supply increases from China, India, and the Middle East, coupled with uncertain recovery in key end markets like automotive, challenges the sustainability of current revenue and EBITDA projections.
  
• Increasing regulatory and environmental compliance requirements, alongside aging asset maintenance-without sufficient downstream diversification-raise the risk of elevated long-term costs, potentially pressuring net margins and deteriorating free cash flow.

Alcoa Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alcoa's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.7% today to 4.4% in 3 years time.
• Analysts expect earnings to reach $593.5 million (and earnings per share of $2.53) by about July 2028, down from $990.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $847.3 million in earnings, and the most bearish expecting $368 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.9x on those 2028 earnings, up from 8.4x today. This future PE is lower than the current PE for the US Metals and Mining industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.7%, as per the Simply Wall St company report.

Alcoa Future Earnings Per Share Growth

Risks

• Strong long-term demand drivers-including the global push for decarbonization, accelerating adoption of electric vehicles, infrastructure investments, and growth in renewable energy-are expected to significantly boost aluminum demand, supporting Alcoa's future revenues and reducing downside risk to long-term top-line growth.
  
• Alcoa's successful development and commercialization of its EcoLum low-carbon aluminum products and the ELYSIS zero-carbon smelting process position the company to capture premium pricing and greater market share as customers and regulators increasingly prioritize sustainability, which could sustain or expand profit margins over time.
  
• Tightening global aluminum supply, driven by production curtailments in China, disruptions in bauxite supply (particularly in Guinea), and new capacity constraints, may improve pricing power and reduce risk of persistent overcapacity and margin pressure-thereby supporting higher ASPs, revenues, and earnings for Alcoa.
  
• Alcoa's ongoing operational initiatives-such as upstream portfolio optimization, cost control programs, and contingency plans for mining approvals-are expected to improve efficiency and cushion EBITDA margins and free cash flow, providing greater resilience against near-term market volatility.
  
• Positive long-term geographic shifts, with North America and emerging markets projected to have higher aluminum demand growth rates than China, provide Alcoa with robust opportunities to grow shipment volumes, increase utilization of its assets, and support stronger revenue and profit recovery.

Valuation

• The analysts have a consensus price target of $34.464 for Alcoa based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $42.0, and the most bearish reporting a price target of just $27.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $13.6 billion, earnings will come to $593.5 million, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $31.93, the analyst price target of $34.46 is 7.4% higher. 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.