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Can Alcoa See Valuation Multiple Expansion in 2H16?


Aug. 23 2016, Updated 4:04 p.m. ET

Valuation multiple

For companies in cyclical industries such as the mining industry, EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] is the preferred valuation metric. A forward EV-to-EBITDA multiple tells us how a company is valued for each dollar of EBITDA.

In this article, we’ll look at Alcoa’s (AA) forward EV-to-EBITDA multiple and compare it with the company’s historical valuation multiple. This approach will help us understand whether Alcoa is trading at a discount or a premium to its historical multiples.

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Current versus historical valuation

Currently, Alcoa (AA) trades at 7.69x its next four quarters’ expected EBITDA. To put this value into context, consider that the company’s forward EV-to-EBITDA multiple has averaged 7.73x in the last three years and 7.2x in the last five years. The current valuation multiples don’t look high, given Alcoa’s historical trading multiples.

Peers in the mining space

Other mining companies are also trading at a significant premium to their long-term valuation multiples. For instance, BHP Billiton (BHP) and Rio Tinto (RIO) are currently trading ~20% above their respective five-year trading multiples. Alcoa’s premium over its long-term valuation multiples is lower than some of the other mining companies (GNR).

However, pure-play aluminum producers like Century Aluminum (CENX) and Norsk Hydro (NHYDY) are trading at a slight discount over their respective five-year trading multiples.

Meanwhile, since the bulk of Alcoa’s earnings come from its Engineering segment, it would be prudent to look at the valuation of some of the comps in the engineering space. In the next part, we’ll compare Alcoa’s valuation multiples to some of the engineering companies.


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