Alcoa Inc (AA), Century Aluminum Co (CENX), Noranda Aluminum Holding Corporation (NOR): One Aluminum Stock to Buy, Two to Hold

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The aluminum industry has long been plagued by an overcapacity issue, with major players in the industry failing to attract enough demand to meet the supply they create. As a result, aluminum prices have not moved in a favorable (upwards) direction for the industry.

Alcoa Inc (NYSE:AA)A surprise call

The overcapacity of the industry is why the market was surprised when Alcoa Inc (NYSE:AA), the first company in the industry to report its earnings in the earnings season, gave an optimistic report during its call. The company said that it perceives the global end markets to be solid, estimating a growth of 7% in global aluminum demand for 2013.

There is no doubt that the growth in demand for aluminum remains high. The silver lining in aluminum remains a bright outlook in demand, both near term (strong China auto/truck demand and demand in commercial building and construction, offsetting weak European demand), and long term (accelerating global aerospace build rates and global automotive volume and market-share gains). Alcoa Inc (NYSE:AA)’s downstream businesses remain well positioned to benefit in both the near term and long term.

The problem, however, remains on the supply side. With primary aluminum supplies still growing faster than demand and with Alcoa Inc (NYSE:AA)’s upstream businesses still highly sensitive to underlying aluminum prices, the supply-related challenges in Alcoa Inc (NYSE:AA)’s upstream businesses will continue to outweigh the demand-related opportunities in Alcoa Inc (NYSE:AA)’s downstream businesses.

Even with solid first quarter results, Alcoa Inc (NYSE:AA)’s near-term profit outlook remains constrained by the underlying aluminum price, which is moving in the wrong direction. This means that second quarter Consensus estimates still need to come down and the potential for a meaningful cash burn still exists.

These are headwinds that are unlikely to disappear in the near term, and which remain largely underappreciated by the equity market.

Best shot in the aluminum industry

After releasing its first quarter results, Century Aluminum Co (NASDAQ:CENX) is the best-placed among the US aluminum producers in terms of company-specific growth, cost savings program and cheap valuations.

The company is expected to achieve growth given its plan to restart Ravenswood project. Also its expanding Grundartangi project and gradual development in the Helguvik project will be of great help.

The cost savings program includes renegotiating power contracts at Ravenswood and Hawesville. As far as valuations are concerned, Century Aluminum Co (NASDAQ:CENX)’s shares currently trade at 6.4 times the company’s estimated 2014 earnings before interest, taxes, depreciation and amortization while the other two US aluminum producers trade at 6.8 times their 2014 EBITDA.

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