Aluminum is a lightweight, silvery-white metal used in an immense variety of products, including cans, high-rise buildings, foils, kitchen utensils, window frames, beer kegs, automotive, and airplane parts.
According to Fortune Business Insights, the global aluminum market size is estimated to grow at a CAGR of 5.7% between 2020 and 2027, hitting $242.44 billion in the terminal year. The increasing demand for aluminum from the automotive and building & construction industries should support the market growth in the long term.
With this in mind, today, I intend to analyze and compare two aluminum stocks: Century Aluminum Company (CENX) and Kaiser Aluminum Corporation (KALU), to see which one looks best for investors' portfolios.
Based in Chicago, Illinois, Century Aluminum and its subsidiaries manufacture standard-grade and value-added primary aluminum products in the US and Iceland. Founded in 1946, Kaiser Aluminum produces and markets semi-fabricated specialty aluminum mill products.
Year-to-Date (YTD), shares of CENX are up 42%, while KALU stock advanced about 2.7% over the same period.
Recent Developments
On February 28th, three-month aluminum prices on the London Metal Exchange spiked up to another all-time high, hitting as high as $3,525 per tonne in unusual volumes. This aluminum price rally was due to increased Western sanctions on major producer Russia after it had invaded Ukraine. For instance, some Russian banks were blocked from the SWIFT international payments system, which can affect commodities exports from Russia. Senior commodities strategist at ING Bank Wenyu Yao said, "Based on current announcements, there's no clear sanction that will target metals flows, but increasing numbers of Russian companies are being impacted, and that has put the market on tenterhooks." As a result, iShares U.S. Basic Materials ETF (IYM) has advanced about 6.2% over the past month.
Recent Quarterly Performance & Analysts’ Estimates
On February 24th, Century Aluminum revealed an earnings report for the fourth quarter of 2021. The company’s total revenue grew 69.4% year-over-year to $659.1 million, primarily driven by higher shipment volume and higher aluminum prices. Notably, shipments of primary aluminum grew 2% quarter-over-quarter to 200,961 tonnes, while realized LME aluminum price stood at $2,605 a tonne in Q4, up $230 a tonne from the prior quarter. However, the company missed the Wall Street revenue estimates by $61.6 million.
Furthermore, its net income came in at $60.4 million in Q4, compared to a net loss of $52.4 million in the third quarter of 2021. As a result, the company's fourth-quarter Non-GAAP EPS has been reported at $0.17, beating estimates by $0.25. Besides, Century Aluminum's Adjusted EBITDA for the fourth quarter was $82.2 million, representing a 17% increase from the prior quarter.
For the first quarter, analysts expect CENX's EPS to come in at $0.76, compared to its year-ago value of ($0.54). Its revenue for the first quarter of 2022 is estimated to grow by 72.30% YoY to $765 million.
Kaiser Aluminum's top line for its fiscal fourth quarter of 2021 increased 196.3% year-over-year to $806 million, beating Wall Street revenue estimates by $55.77 million. The increase in revenue was mainly driven by a 179% increase in shipments to 333 million lbs. and a 6% increase in average selling price per pound to $2.42 compared to a year-ago period. Additionally, the company reported a Non-GAAP EPS of $0.20, missing analysts estimates by $0.71.
The company's net income has been reported at $2 million compared to a loss of $2 million in 3Q2021. However, its Adjusted EBITDA stood 8% lower quarter-over-quarter at $46 million. KALU's Adjusted EBITDA margin also dropped by 200 bps QoQ to 14.5%.
Currently, Wall Street expects KALU's EPS to grow 50.00% year-over-year in FQ1 to $0.96. Moreover, the $854.23 million average revenue estimate for the current quarter implies a 163.65% increase year-over-year.
Comparative Valuation
In terms of Forward P/E, KALU is currently trading at 25.34x, which is 240% higher than CENX, whose multiple is currently standing at 7.46x. In addition, Century Aluminum's Forward P/E multiple looks undervalued compared to the sector's median threshold of 14.40x.
When it comes to the Forward EV/EBITDA multiple, KALU's EV/EBITDA multiple of 9.69x is about 104% higher than CENX's 4.75x. Also, Century Aluminum's multiple looks discounted compared to the sector median of 7.81x.
The Bottom Line
At the moment, I believe Century Aluminum is the better buy. In my opinion, Century Aluminum is poised to benefit more from the higher aluminum prices compared to Kaiser. Although Kaiser has higher revenue, as well as higher revenue growth figures, Century's net income and Adjusted EBITDA numbers look superior to Kaiser's ones. Not only does Century Aluminum look relatively cheaper compared to KALU from a valuation standpoint, but it is also presently discounted to the sector's median, thus providing investors with a significantly higher margin of safety.
CENX shares were trading at $26.13 per share on Tuesday morning, up $2.51 (+10.63%). Year-to-date, CENX has gained 57.79%, versus a -8.58% rise in the benchmark S&P 500 index during the same period.
About the Author: Oleksandr Pylypenko
Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.
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