Will Alcoa See a Re-Rating after Its 1Q16 Earnings?



Analysts’ ratings of Alcoa

According to data compiled by Bloomberg, out of 19 analysts, eight rate Alcoa (AA) a “buy,” and only one analyst rates the stock a “sell.” The remaining analysts rate Alcoa a “hold.” Alcoa carries a consensus one-year target price of $10.73, which represents a potential rise of 10% from the current price. Notably, some of the other mining companies (GNR) are trading above their consensus one-year target prices thanks to the recent rally in the sector.

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Norsk Hydro (NHYDY) and Century Aluminum (CENX) are already trading above their consensus one-year target prices. Rio Tinto (RIO) is trading a whisker short of its consensus target price. However, Constellium (CSTM), which is a European fabricator, is still trading 57% below its consensus one-year target price.

Post-1Q16 earnings re-rating?

After 1Q16 earnings, we could see a re-rating of Alcoa and some of the other aluminum producers. Analysts will take cues from the commentary provided by Alcoa’s management on the company’s 2016 outlook. Previously, Alcoa had forecast a huge deficit in both the aluminum and alumina markets in 2016. We indeed have seen big production cuts in China. However, production excluding China seems to be ramping up. You can explore this further in Aluminum Premiums Stay Weak as Production ex-China Ramps Up.

Alcoa’s split

During the company’s 4Q15 earnings call, Alcoa didn’t provide any updates on how its debt liabilities will be shared after the company is split later this year. Alcoa is in talks with the PBGC (Pension Benefit Guarantee Corporation) regarding its employee benefit obligations. The final debt allocation will be based on Alcoa’s dialogue with the PBGC.

Analysts can look for possible clues on the post-split capital structure during Alcoa’s 1Q16 earnings conference call. Note that the capital structure will be a key driver of Alcoa’s post-split valuation. You can explore this in detail in our series titled Alcoa’s Post-Split Valuation: A Look at the Drivers.

You can also read Will Alcoa’s Splitting into 2 Companies Add Shareholder Value? to find out the strategic rationale for the split.


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