There are several metrics that can be used to value a company. However, for commodity companies, the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is the preferred valuation metric. A forward EV-to-EBITDA multiple tells us how a company is valued for each dollar of its EBITDA.
In this article, we’ll look at Alcoa’s (AA) valuation multiples.
Trading at a premium
Currently, Alcoa is trading at 8.6x its forward EBITDA. This valuation multiple looks somewhat aggressive for a pure-play commodity producer (XME). However, there are several factors driving Alcoa’s valuation. Let’s discuss this in perspective.
First, the entire mining space has seen a rerating following the election of Donald Trump in the United States. As a result, mining companies’ valuation multiples have seen some expansions.
Second, Alcoa’s current valuation multiples are based on an expected EBITDA of $1.2 billion in 2017. In our view, this earnings estimate could be conservative, looking at current commodity prices.
Integrated operations make Alcoa one of the few listed pure-play aluminum producers. Most top aluminum producers are Chinese companies. Rio Tinto (RIO) is another major aluminum producer, but the company is mainly an iron ore play. Century Aluminum (CENX) doesn’t have an upstream business. Norsk Hydro (NHYDY) is one of the few publicly traded integrated aluminum producers.
US investors have few options to play the aluminum industry. Based on its being a pure-play integrated aluminum producer, Alcoa could command a scarcity premium.
Alcoa’s growth drivers could change in 2017. You can read Analyzing Alcoa’s Growth Drivers after the Split to explore this possibility in detail.
You can also visit Market Realist’s Aluminum page for ongoing updates on the industry.