There are several reasons to expect Alcoa's shares to weaken in the coming months, BMO Research analyst Tony Robson wrote in a note, in which he forecast a weaker aluminum price and downgraded his rating to underperform.
He cited disappointment at Alcoa's fourth-quarter results, despite a stronger metal price during the quarter.
Robson also said there were market fears that the majority of Alcoa's production cost savings were now over, while the U.S. dollar was weakening and energy prices were rising.
But he raised his 2010 earnings estimate for the company, adding that shares are at levels half that seen two years ago, suggesting potential upside whenever the aluminum market rebalances, hopefully by 2012.
Several investment banks -- UBS, RBC, Desjardins and Credit Suisse -- raised their share price targets for the company.
Alcoa's stock fell about 5 percent in after-hours trading on Monday and was down over 8 percent, at $15.97 in Tuesday morning trading on the New York Stock Exchange.
In other research, analyst Leo Larkin of Standard & Poor's Equity Research maintained his hold recommendation on Alcoa shares as well as the 2010 earnings estimate of 88 cents per share and share price target of $18.
We view Alcoa as a special situation turnaround and a vehicle to capitalize on improving aluminum industry fundamentals, but we would not add to positions with Alcoa trading with little upside to our target price, he wrote.
Dahlman Rose & Co's Tony Rizzuto noted that although economic recovery should help results, two key end-markets remained weak and he had expected Alcoa to benefit more from a 9-percent boost in the aluminum price in the fourth quarter.
Management indicated that the aerospace and industrial gas turbine segments continue to face challenges, which is being compounded by destocking, he wrote in a research note.
We had anticipated that the company would exhibit more leverage to increasing aluminum prices.
The company stands to benefit from increased profitability in its alumina business, Rizzuto said, referring to the raw material for the metal, which is refined from bauxite.
But we remain concerned that the company's primary aluminum business exhibits less leverage to the metal than in the past.
Aluminum, used in automobile and plane manufacture, and for kitchen wrap and beverage cans, reached a peak of $3,380 per ton in July 2008. But it slumped 35 percent later as the global economy went into recession and has only slowly risen. On Tuesday the metal was selling in London at around $2,300.
A weak dollar and excess warehouse aluminum inventories, as well as tepid demand in some sectors, might limit the metal's rally, some analysts say.
(Reporting by Steve James; Editing by Derek Caney)