Kaiser Aluminum (KALU): A Recent Pullback Creates an Attractive Entry Point
Kaiser Aluminum (KALU) has had a rough few months, but we think the recent weakness has created an opportunity to buy a business whose earnings outlook appears to be improving.
Shares have fallen about 14% over the past three months and recently traded roughly 20% below their 52-week high of $199.89, reached on August 12. Trade-related headwinds and a leadership shakeup have weighed on the stock, but several underlying business trends suggest the selloff may have gone too far.
The stock trades around $159 per share.
One reason we’re becoming more constructive is that Kaiser should continue benefiting from favorable conditions in the aluminum industry, including lower scrap costs. But this isn’t simply a commodity-price story. Investments the company has made in its Warrick and Trentwood facilities are beginning to contribute to improving fundamentals.
We’re also encouraged by what’s happening in Kaiser’s aerospace business.
The aerospace industry has been working through a period of destocking, which has weighed on suppliers. That process appears to be coming to an end at the same time aircraft production rates are accelerating. For Kaiser, that combination could translate into improving demand as customers begin purchasing more material to support higher build rates.
These factors give the company several potential earnings drivers working at once: favorable scrap economics, benefits from previous investments at Warrick and Trentwood, and improving aerospace demand.
The recent decline also makes the valuation setup more interesting from a risk-reward perspective. Kaiser shares remain well below their August 12 high even as the company’s underlying earnings power appears to be strengthening.
UBS recently upgraded Kaiser Aluminum from Neutral to Buy and raised its price target from $179 to $184. That target represents nearly 18% upside from Friday’s closing price.
Wall Street as a whole is more divided on the stock. According to the LSEG data provided in the source, four analysts cover Kaiser Aluminum, with two Buy ratings and two Underperform ratings. The average price target is $178.67, representing roughly 12.5% upside, while the highest target is UBS’s $184.
That split in opinion doesn’t necessarily concern us. In fact, it helps illustrate why we think the current setup is interesting. The stock has already absorbed a meaningful amount of negative sentiment, while several of the factors that could improve Kaiser’s earnings are beginning to move in the right direction.
Shares gained nearly 3% during Monday’s session, suggesting investors may already be starting to reconsider the recent selloff.
We believe Kaiser Aluminum offers an attractive recovery opportunity at current levels. The stock is roughly 20% below its recent high, yet the company could benefit from improving aerospace demand, previous investments in its manufacturing operations and favorable scrap economics.
If those trends translate into stronger earnings as expected, we think Kaiser Aluminum has room to recover from its recent decline, making the current pullback an attractive opportunity for investors willing to buy before that improvement becomes more apparent.
