An Investor’s Guide To Century Aluminum’s Valuation

Century Aluminum (CENX) has a share buyback program in place. Recently, its board of directors increased the size of the share buyback. Now, it has been increased by $20 million. The size of the share buyback program stands at $30.1 million. Companies undertake a share buyback program when they believe their share prices are undervalued. In this part of the series, we’ll analyze Century Aluminum’s valuation.

The above chart shows Century Aluminum’s 12-month forward EBITDA (earnings before interest, tax, depreciation, and amortization). Analysts generally use forward EV (enterprise value)/EBITDA to value industries in the metals space. It’s a preferred ratio compared to the price-to-earnings, or PE, ratio.

Century Aluminum’s EV/EBITDA corrected sharply over the last few months. This is in line with the fall in its share price. During the analysis of Century Aluminum’s third quarter earnings, we noted how it’s one of the most expensive plays in the aluminum industry.

The valuation of any enterprise is a function of its growth opportunities and the risk associated with the business. Aluminum demand is expected to be higher in 2015—compared to last year.

This is unlike steel or the iron ore industry where the demand has been hit hard by the slowdown in China. The iShares China Large-Cap (FXI) gives you exposure to Chinese equity markets. Alcoa (AA) has operations in China. Mining giants—like Rio Tinto (RIO) and BHP Billiton (BHP)—are also impacted by the slowdown in China.

However, along with the expected growth in demand, there are several risks that the aluminum industry faces this year. We’ll discuss these risks in the next part of this series.