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Are Alcoa’s Earnings Estimates a Little Conservative?

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Aug. 24 2016, Updated 10:04 a.m. ET

Alcoa’s earnings estimates

Any stock rises with an expansion of trading multiples or with an increase in earnings. As discussed in the previous part, Alcoa (AA) could see some expansion in its trading multiples. In this article, we’ll look at Alcoa’s forward earnings estimates.

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Are Alcoa’s earnings estimates conservative?

According to the consensus estimates compiled by Bloomberg, analysts expect Alcoa (AA) to post an adjusted EBITDA[1. earnings before interest, tax, depreciation, and amortization] of ~$3.1 billion in the next four quarters.

To put this in context, Alcoa generated an adjusted EBITDA of $754 million in 2Q16 and ~$1.4 billion in 1H16. Alcoa’s 1Q16 EBITDA was negatively impacted by lower metal prices. Alcoa’s Upstream business generated an adjusted EBITDA of $185 million in 1Q16. Its EBITDA rose to $358 million in 2Q16 on improved metal prices.

Other primary aluminum producers like Century Aluminum (CENX) and Norsk Hydro (NHYDY) also reported sequentially higher earnings in 2Q16 as higher metal prices boosted earnings. You can read How Do Aluminum Producers Look Going into 3Q16? to find out how different aluminum companies fared in 2Q16.

Upward earnings revision

Analysts have upwardly revised Alcoa’s (AA) earnings estimates in August, as can be seen in the graph above. In the next part of this series, we’ll explore whether analysts are still conservative with their earnings estimates. We’ll examine the outlook for Alcoa’s Upstream business in the next part of this series.

You can also consider the Materials Select Sector SPDR ETF (XLB) to get diversified exposure to the materials sector. Metal producers currently form 12.9% of XLB’s portfolio. Together, Alcoa and Ball Corporation (BLL) form ~5.2% of XLB’s portfolio.

Alternatively, investors looking at direct exposure to aluminum can also consider the PowerShares DB Base Metals ETF (DBB). DBB invests one-third of its holdings in aluminum.

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