Industry Trend Analysis - Industry Headwinds To Temper Alcoa Rally - NOV 2014

BMI View: Alcoa 's financial and equity performance will face headwinds in the quarters ahead. While recent cost reductions and asset sales have boosted the firm's balance sheet and share price, the company will grapple with subdued all-in aluminium prices and underperform a broader index of global miners.

We maintain that Alcoa and other US and European aluminium producers will see their share prices underperform global miners in the coming quarters ( see ' Bearish Aluminium Producers Relative To Global Miners ,' September 24). Alcoa's price-to-book (PB) ratio exceeded the PB ratio of the Bloomberg World Mining Index for the first time in a decade in October 2014, coming in at 1.54 compared to the index's value of 1.52. Rather than representing a new paradigm, we expect Alcoa's future performance to revert to its historical trend.

Whereas we believe the prospect of further metal price weakness has largely been priced into mining stocks as evidenced by the sector's low valuations, we maintain a below-consensus outlook on all-in aluminium prices over a multi-quarter horizon. We believe global miners are currently trading at major discount but are unlikely to fall significantly further, as broader investor sentiment towards the mining industry is likely to cease deteriorating as global miners emerge as smaller, yet more sustainable, firms in the coming quarters. In contrast, we do not believe Alcoa and Century Aluminium will continue trading at their current premium over the Bloomberg index on account of subdued aluminium prices.

Aluminium Producers Looking Expensive
Price-To-Book Ratio - Select Equities & Indices

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