Better Aluminum Prices Buoy Alcoa and Century; Shares Fairly Valued

Aluminum prices on the London Metals Exchange （LME） increased more than 10% in the fourth quarter, and have continued to climb into 2011. This should provide a meaningful boost to profitability for aluminum producers Alcoa AA and Century Aluminum CENX for the fourth quarter, and the demand outlook for the metal remains favorable.

While Century is more dependent on aluminum prices for near-term earnings growth, we believe cost improvements will be a primary driver of Alcoa's recovery. Alcoa's stock price has closely tracked the LME aluminum price in the past, but we think the shares are starting to reflect the improved performance of its downstream segments and other areas independent of the aluminum price. For example, the EBITDA margins of its engineered products segment are already at a 10-year high and the rolled products division is almost back to its precrisis profitability, even while operating at only 80% of capacity. Even if aluminum prices fail to climb any higher, Alcoa should be able to generate strong earnings in 2011, and we will look to gain more color on the demand front when the company releases fourth quarter earnings next Monday.