Kaiser Aluminum (KALU): Risk / Reward Becoming More Favorable - Upgrade to Neutral Following Recent Underperformance

We upgrade KALU to Neutral from Underweight and establish a $140 Dec-27 price target following last week's 3Q26 print. We had previously downgraded on the view that valuations were pricing in peak scrap spreads. After the recent 29% weekly decline (vs. XME -5%), which we attribute to evidence of post-peak spreads and execution factors, we now see the risk/reward as more balanced, with shares at 6.4x/6.8x FY27 BBG/JPMe EV/EBITDA versus 8.0x/7.8x TTM/5-year averages. Shares are likely to trade sideways over the next 1-2 quarters until investors accept that near-term challenges are not structural and gain confidence in the commercial aero ramp and FY27 pricing power. 3Q results included 640bps (~$28M) of execution headwinds from Bellwood retooling, casthouse outages limiting scrap utilization, slower roll coat four customer trials and deferred packaging shipments. We cut 4Q EBITDA 19% to ~$74M, moderating FY26 EBITDA to $453M, while FY27 EBITDA is largely unchanged and 6% below consensus.