Alcoa Corporation's (NYSE:AA) Shares Climb 27% But Its Business Is Yet to Catch Up

Simply Wall St · 10/16 18:40

Alcoa Corporation (NYSE:AA) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 49%.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Alcoa's P/S ratio of 1x, since the median price-to-sales (or "P/S") ratio for the Metals and Mining industry in the United States is also close to 1.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Alcoa

ps-multiple-vs-industry
NYSE:AA Price to Sales Ratio vs Industry October 16th 2024

How Has Alcoa Performed Recently?

Alcoa could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Keen to find out how analysts think Alcoa's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like Alcoa's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 1.5% decrease to the company's top line. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, revenue is anticipated to climb by 8.6% during the coming year according to the twelve analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 20%, which is noticeably more attractive.

In light of this, it's curious that Alcoa's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What We Can Learn From Alcoa's P/S?

Alcoa's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our look at the analysts forecasts of Alcoa's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Alcoa that you need to be mindful of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.