As noted in the previous part, Alcoa (AA) (ARNC) expects to generate adjusted EBITDA[1. earnings before interest, tax, depreciation, and amortization] between $2.1 billion–$2.3 billion in fiscal 2017. According to consensus estimates compiled by Thomson Reuters, analysts expect Alcoa to post adjusted EBITDA of $1.6 billion this year, as well as similar EBITDA in fiscal 2018.
So, why does Wall Street seem less than excited about Alcoa’s outlook? Let’s find out.
In its 2017 EBITDA guidance, Alcoa (AA) assumed aluminum prices of $1,795 per metric ton and an API (alumina price index) of $355 per metric ton. Currently, aluminum is trading somewhat higher than Alcoa’s guidance. Higher aluminum prices should benefit producers like Century Aluminum (CENX), Rio Tinto (RIO), and Norsk Hydro (NHYDY).
However, 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.
Markets could be in a surplus
In 2017, Alcoa (AA) expects global aluminum markets to be in a surplus, which means production in excess of demand. Markets are said to be in a deficit when demand exceeds production. A surplus tends to put pressure on commodity prices.
Higher aluminum prices could prompt Chinese smelters to churn out more metal this year. The country’s aluminum demand growth rate is also expected to moderate this year compared to 2016.
Analysts seem to be pricing in a correction in aluminum prices in arriving at Alcoa’s earnings estimates. Later in this series, we’ll see how this could impact Alcoa’s valuation multiples. In the next article, we’ll look at Alcoa’s cash flows.