Alcoa Overvalued Despite Sell-Off

We continue to view shares as overvalued. Although today's sell-off indicates that investors now anticipate weaker growth for the company's aerospace-facing product lines, we also maintain a negative outlook for aluminum prices. We expect the aluminum cost curve to shift lower amid large-scale capacity additions in China, and we anticipate that Chinese aluminum demand growth will continue to decelerate. We forecast only 2% annual demand growth in China through 2020, well below consensus expectations for 5% annual growth. Our long-term aluminum price forecast is $1,440 (in real terms), roughly 17% below current spot prices.

Alcoa remains on track to split into two companies on Nov. 1. The legacy upstream operations will retain the Alcoa name, while the value-add operations will be housed by a new company named Arconic. As of Oct. 11, we view the split as value-neutral, as both dis-synergies and efficiency gains will likely prove modest.

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