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Is Alcoa's Valuation Overstretched?
Posted: 07/02/09
By: tomgrisafi
Shares of Alcoa have more than doubled since the capital raise on March 19 (compared to the S&P 500 strengthening approx 20%), primarily due to: (1) diminished liquidity concerns; (2) improved market sentiment and the reflation trade; and (3) the recent strength in London Metal Exchange (LME) pricing due to a large amount of Chinese imports and broad market restocking.
According to Barrons:
"While we are on board that less-than-bad Purchasing Manager's Index, industrial productions, and durable goods orders are signs of "green shoots," we believe that demand upticks are not enough to offset the overhang in LME inventory. We also believe the aluminum market is structurally oversupplied, as we are already seeing Chinese smelters coming back on line (1.7 million metric tons according to the Chinese Non-Ferrous Metal Association) amid higher prices and lower production (power) cost. Furthermore, despite our slightly higher-than-consensus aluminum-price assumptions (86 cents per pound versus 85 cents per pound) and our aggressive cost-cutting assumptions, we still believe that Alcoa's valuation is overstretched."
Source: Barrons
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