Aluminum companies’ valuation
Previously in this series, we explored the aluminum industry’s value chain. Now, we’ll look at how the market values different aluminum companies. Please note that there are several valuation metrics that you can use. However, for companies in capital-intensive industries, like aluminum, EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) is the preferred valuation metric.
The above chart shows the forward EV/EBITDA for certain companies. As you can see, the valuations of primary aluminum producers including Century Aluminum (CENX) and Norsk Hydro (NHYDY) have corrected steeply over the last year. This isn’t a surprise considering the steep fall in these companies’ share prices. The forward EBITDA estimates have also been revised downwards looking at the fall in all-in aluminum prices.
However, if market conditions improve, primary producers’ share prices could see a sharp rise.
Currently, Century Aluminum forms 2.68% of the SPDR S&P Metals and Mining ETF (XME).
Alcoa’s (AA) valuation has also fallen over the last year. Currently, it trades at a discount to its five-year average. However, please note that the valuations fell for a reason. Aluminum prices are testing their six-year lows and the outlook doesn’t look as positive at the moment.
Precision Castparts’ (PCP) forward EV/EBITDA has been stable over the last five years—just like its EBITDA margins. Although the company isn’t an aluminum play in a true sense, its valuations tell us how markets value commodity companies differently.
This is exactly what Alcoa is trying to do with its transformation strategy. Alcoa intends to be seen as a multi-material company. The company has been cutting down its high-cost upstream operations while aggressively expanding its value-add portfolio.
Precision Castparts’ forward EV/EBITDA is almost double that of Alcoa. This isn’t to suggest that Alcoa’s valuations are doubling any time soon. But, as Alcoa grows its value-add business, its EBITDA margins are expected to improve. Please note that Alcoa’s Downstream segment’s EBITDA margins are much higher than its upstream business.
You can learn more about this industry by visiting Market Realist’s Aluminum page.