Merrill Lynch Jumps Into the Aluminum Upgrade Brigade

Merrill Lynch upgraded Alcoa shares to Buy, citing a better cash outlook and improved aluminum fundamentals. Aluminum is looking more favorable, and Alcoa shares have the potential to soar higher if positive contagion chatter increases as the F-150 rolls out with more aluminum content. Pension costs associated with the closing of high-cost operations are expected to fall nearly $100 million year over year.

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Merrill Lynch issued an $18 price target on Alcoa. However, if Midwest premiums remain steady, the price target could move as high as $21. The firm has estimates of $1.05 in earnings per share for fiscal year 2015. Thomson Reuters has an estimate of $0.88 in earnings per share. Alcoa has a consensus price target of $16.56 for its stock and a 52-week trading range of $7.82 to $17.36. Its market cap is $18 billion.

Merrill Lynch upgraded Century Aluminum to Buy from Neutral and raised the price target to $30 from the previous level of $21. This is based on a more positive stance on global aluminum markets due to an attractive entry point created by a recent retreat in stock. The firm expects earnings to be revised up near term on mark-to-market aluminum price recovery.

Midwest premium forecasts for a new estimate of $2.50 in earnings per share for the fiscal year 2015. Thomson Reuters has an estimate of $2.18 in earnings per share for fiscal 2015. Other compelling catalysts that allow for more upside, beyond a better aluminum price and higher Midwest premiums, are as follows: a smelter restart in Ravenswood, further power savings at Mt. Holly smelter and an eventual Helguvik smelter restart. Century Aluminum has a consensus price target of $26.17 for its stock and a 52-week trading range $7.80 to $29.54. Its market cap is $2 billion.

The upgrades were having a positive impact on the shares in early trading on Tuesday. Alcoa shares were up about 1.5% at $16.17 in early trading, while Century Aluminum was up more than 4% to $24.95. We will be keeping an eye on the stock prices for potential updates based on the upgrades.

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