Why Alcoa Expects Its Profits to Surge in 2017



Alcoa’s profits

Previously in this series, we looked at Alcoa’s fiscal 2017 shipment guidance. In this part, we’ll look at the company’s earnings guidance. There are several metrics you can use to measure an enterprise’s profitability. Net profit is widely used to measure a company’s profitability.

For companies in the commodities space (XLB) like Century Aluminum (CENX), Rio Tinto (RIO), and Norsk Hydro (NHYDY), EBITDA[1. earnings before interest, tax, depreciation, and amortization] is generally used.

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2017 EBITDA guidance

Alcoa (AA) expects to generate adjusted EBITDA 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 ~$1,800 per metric ton and an 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. Let’s examine the rationale for the company’s optimism regarding its 2017 earnings capacity.

Commodity prices

Aluminum prices averaged $1,611 per metric ton in 2016 while API averaged ~$253 per metric ton. Both commodities were much lower in 2016 compared to their current price levels. Higher bauxite sales in fiscal 2017 could also bode well for Alcoa’s EBITDA, given the fact that it’s a high-margin business for the company.

While Alcoa expects its EBITDA to almost double in 2017, Wall Street analysts don’t seem too convinced. We’ll discuss this in the next article.


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