Wednesday, August 19, 2009

Alcoa (NYSE:AA): Downgraded at Goldman Sachs

Goldman Sachs is taking down their rating on Alcoa (NYSE:AA):

What happened
We are downgrading Alcoa to Neutral as the share price is near our target of $13, and we do not see much upside from current levels. Aluminum fundamentals remain weak, with inventories at historically high levels, and there is enough excess aluminum capacity around the world that could be brought online, which could cap rising aluminum prices. We recommend investors rotate into Conviction Buy Freeport McMoRan in light of our more bullish view on copper. Since being added to the Buy list on May 15, 2009, Alcoa shares are up 36.1% vs. S&P 500 up 8.8%. The stock fell 58.5% in the last 12 months vs. S&P 500 down 22.6%.

Current view
We added Alcoa to our Buy List on May 15, 2009 on the belief that share prices more than reflected the weakaluminum fundamentals at the time. In addition, aluminum demand has a high beta to global GDP and the commodity has historically performed well in recovering economic environments. While aluminum prices and Alcoa shares have since risen, exchange aluminum inventories have also increased by over 15%, and we believe fundamentals are now even less appealing. As the world economy recovers, we believe the different supply-demand dynamics of aluminum and copper will become more transparent and set the stage for a period of differentiated performance among the base metals with copper leading, aluminum lagging, and the correlation among the metals breaking down. In contrast to aluminum where we see challenging, structural issues, we believe that copper is the best positioned among base metals as sharp demand increases, coupled with constrained supply, will manifest in sharp commodity price upside. For more details, see our piece, “Copper: cyclical and structural winner – resuming FCX with CL-Buy.” It is important to note that while we believe aluminum will remain challenged for the foreseeable future, trading opportunities may win over structural issues from time to time, as we argued in our May call.

Action: While it is basically a valuation call only lacking any catalysts that I would usually expect from a call I highlight, I like the set-up for today. We have China markets getting whacked again, especially metals sector, futures are down and got a downgrade from Tier-1 house. Add this up and I can see AA trading close to $12 levels today, down from current $12.40 in the pre-mkt.

Those who think AA is already too low for their taste might want to take a look at other metal stocks with higher China exposure - SCHN for example. There were some not so good #s out from Chinese steel producers today. Take a look at SCHN call from Morgan Stanley on Monday from archives.

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