Alcoa looks expensive, but analyst feels shares could hold up

Alcoa’s had a great run to start off 2014–its stock has gained 15% so far this year–but its shares are looking mighty pricey. That doesn’t have to kill the stock, however.

Morgan Stanley’s analysts note that at 34 times 2014 earnings forecasts, Alcoa looks more than a little expensive. Its “historical” one-year forward P/E is 14 times. But they see three reasons that Alcoa’s shares could hold up OK. They explain:

1) 1Q Consensus looks too low. Based on quarter-to-date average FX, alumina and aluminum prices, we think 1Q14 EPS could be around ~$0.10/sh vs. current consensus at $0.04/sh.We have not marked to market our 1Q14 estimate yet.
2) Auto body sheet story has gained traction. We sense that investors are looking for more ways to get exposure to rising use of aluminum in automotives. Given the longer-term (2015-2020) impact on earnings, many investors may overlook weakness in near-term earnings. AA’s management hasalready guided to ~50% YoY decline in ATOI in Global Rolled Products segment (main beneficiary of BIW growth) in 1Q14…
3) Bauxite supply risk. Alumina prices are $15/T below the YTD peak level, achieved when the Indonesian ban started. That said, there is some expectation that Indonesia may not restart bauxite export this year, which could tighten the market.
Still, Morgan Stanley’s base case for Alcoa’s stock is $11 a share, 11% lower than today’s price.
Shares of Alcoa have gained 1.9% to $12.17 at 11:57 a.m.