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Alcoa’s PE Ratio: Is There Room for a Multiple Expansion?

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Alcoa’s PE ratio

In this part, we’ll discuss Alcoa’s valuation and its earnings. We’ll look at its forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) and PE (price-to-earnings) ratio.

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EV-EBITDA multiple

Alcoa (AA) is trading at 5.15x its expected 2017 EBITDA and at 5.31x its consensus 2018 EBITDA. Century Aluminum (CENX) has a forward EV-to-EBITDA multiple of 10.88x based on its 2017 expected earnings and 7.78x based on its 2018 consensus EBITDA. Norsk Hydro (NHYDY) is trading at 7.41x based on its 2017 consensus EBITDA and at 6.22x based on its expected 2018 EBITDA.

PE ratio

Alcoa has a PE ratio of 15.4x based on its 2017 consensus earnings and 15.57x based on its 2018 consensus earnings. Rio Tinto (RIO) has the lowest PE multiple in our select group, while Century Aluminum’s PE multiple is the highest.

Although we don’t have historical valuation multiples for Alcoa because the stock was split late last year, its valuation multiples look reasonable compared to other aluminum producers (DIA) (DJIA-INDEX). However, we should remember that valuation multiples are determined after taking consensus earnings estimates into account. Alcoa is expected to post an adjusted EBITDA of $2.12 billion in 2017 and $2.06 billion in 2018, according to consensus estimates compiled by Thomson Reuters. The earnings estimates seem conservative if we assume that the current commodity pricing environment continues in 2018. Looking at consensus earnings estimates, Wall Street analysts seem to factor a downwards correction into aluminum prices.

Some of the brokerages have taken a fresh look at Alcoa amid strengthening aluminum prices.

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