How Analysts View Alcoa’s Earnings Estimates



Alcoa’s earnings guidance

Alcoa (AA) expects to generate adjusted EBITDA[1. earnings before interest, taxes, depreciation, and amortization] between $2.1 billion–$2.3 billion in fiscal 2017. The guidance assumes constant foreign currency exchange rates and physical aluminum premiums. In arriving at this guidance, Alcoa assumed aluminum prices at $1,795 per metric ton and API (alumina price index) of $355 per metric ton.

Alcoa’s adjusted EBITDA totaled $1.1 billion in fiscal 2016. Looking at Alcoa’s guidance, it expects its EBITDA to almost double this year.

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Consensus estimates

According to consensus estimates compiled by Thomson Reuters, analysts expect Alcoa to post adjusted EBITDA of ~$1.8 billion this year, as well as a similar EBITDA level in fiscal 2018. Analysts have upwardly revised Alcoa’s earnings estimates in the last couple of weeks.

Are estimates still conservative?

Looking at the current pricing environment, aluminum prices are in the ballpark of $1,900 per metric ton. US Midwest aluminum premiums have also seen increases that are comparable to what Alcoa assumed in its guidance. Higher aluminum prices should benefit producers like Century Aluminum (CENX), Rio Tinto (RIO), and Norsk Hydro (NHYDY).

So, does this means that analysts are still conservative with Alcoa’s estimates? Well, not exactly. It’s important to note that analyst estimates are based on expected average commodity prices rather than on prevailing commodity prices. Not many observers expect aluminum prices to sustain their recent gains. Analysts seem to be pricing in a correction in aluminum prices as they determine Alcoa’s earnings estimates. Nonetheless, in our view, there could still be some more upside to Alcoa’s earnings estimates.

In the final part of this series, we’ll see what Arconic (ARNC) could do with its excess cash.


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