JP Morgan sees huge potential in aluminium production. It sees these 2 stocks as winners in this sector.
Today we look at one sector that JP Morgan analysts believe could prosper even in the event of a recession, which most analysts expect. What sector is it? And which 2 companies do JP Morgan see as potential candidates?
The overall economic outlook through the second half of 2023 does not suggest optimistic prospects. With the likelihood of a recession by the end of the year reaching as high as 64%, investors are in the difficult position of having to choose their investments carefully. However, in this climate of uncertainty, the aluminium industry appears to represent an attractive option. JPMorgan analyst Bill Peterson sees considerable potential in the sector.
According to Peterson, aluminium will play a key role in the transition to a greener economy. Demand for aluminium in electric cars, wind and solar power plants is expected to grow from 2.4 million tonnes in 2020 to 3.8 million tonnes by 2025. This sharp increase reflects the growing emphasis on sustainability and efficiency in the energy sector. Aluminium, with its excellent conductivity and lightweight properties, is particularly suited to these emerging markets.
Constellium SE $CSTM+3.2%
Constellium SE
CSTMConstellium SE, headquartered in Paris, is one of the leading global players in the aluminium industry. Founded in 2011, the company has since focused on manufacturing aluminium products for a range of industries, including automotive, aerospace and packaging.
The company operates more than 28 plants across North America, Europe and Asia and employs more than 12,000 people. Some of the company's largest and most serious customers include Ford $F+0.6%, and Boeing $BA+3.4%.
Ford
F
For the year 2022, the company reported revenues of $8.54 billion, an increase of approximately 17% year-over-year. The company's net income for 2022 was approximately $316 million. This represents a year-over-year increase of approximately 4%.
One of Constellium's key strengths is its strong position in recyclable aluminum. This makes the company ideally positioned to take advantage of the growing demand for sustainable materials. Recyclable aluminium also has a lower carbon footprint than virgin aluminium, another plus point at a time of increasing emphasis on sustainability.
However, like any company, Constellium faces some challenges. Recycling aluminium is a difficult process that requires significant amounts of energy and can be costly. In addition, while the growing demand for recycled aluminium is an opportunity, it is also a source of competition as other companies enter the market.
According to Peterson, the company is a good candidate because of its position in the sector.
In our view, Constellium has the greatest growth potential among our downstream coverage because we like its combination of end-market exposure that can help it weather the aerospace recession while providing a strong, long-term foundation for growth.
Along with this commentary, Peterson set a $24 price target. But he's not the only one optimistic about the stock. A total of 5 analysts have looked at this stock recently and have agreed on an average target price of around $20.
Alcoa Corporation $AA+0.3%
Alcoa Corporation, based in Pittsburgh, Pennsylvania, is one of the oldest companies in the aluminum industry, having been founded back in 1888. Alcoa is a major player on the global aluminum scene, producing premium primary aluminum and alumina products. The company works with global customers in a wide range of industries, including such commonplace products as household appliances and cookware, cars and bicycles, as well as aerospace and automobiles.
The company generated revenues of $12.76 billion last year, an increase of about 2.5% year-over-year. In terms of net profit, the company generated a loss of EUR 123 million last year. USD 123. This was mainly due to strong headwinds such as rising inflation and interest rates and gaps in the supply chain, which resulted in an increase in the company's production costs.
One of Alcoa's main strengths is its efforts to reduce its carbon footprint. The company produces low-carbon and recyclable aluminium, allowing it to benefit from the growing demand for sustainable materials. Alcoa is also known for its premium products and has a strong reputation for quality and reliability in the industry.
However, Alcoa also faces challenges. Producing low-carbon and recycled aluminium is expensive and requires significant amounts of energy. Alcoa also has to fight increasing competition in the aluminium market and maintain its market share in the premium primary aluminium sector.
So what attracted Peterson to the company?
Our view rests on the positive outlook for the aluminum price given supply constraints and strong secular growth trends for the commodity, which can help fund shareholder returns and future growth initiatives. The company has systematically improved its pension-related cash funding and has no short-term debt obligations, which puts it in a good position in a potential recession
Along with this comment, Peterson set a target price of $54. But he's not the only one who's optimistic about the stock. A total of 8 analysts have looked at this stock recently and have agreed on an average target price of around $48.
Conclusion
Despite the gloomy economic outlook, there are opportunities for investors who are willing to look in a variety of sectors. The aluminum industry, fueled by growing demand from green energy and electric vehicles, represents one such opportunity. Companies like Constellium and Alcoa, with their focus on sustainability, are well positioned for future growth. JPMorgan analyst Bill Peterson believes these companies are recession-proof and represent attractive investment opportunities for investors in these uncertain times.
WARNING: I am not a financial advisor, and this material does not serve as a financial or investment recommendation. The content of this material is purely informational.
