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Analyzing Alcoa’s Valuation Conundrum

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Alcoa’s valuation

Previously in this series, we looked at aluminum’s outlook and Alcoa’s (AA) earnings estimates. In this part, we’ll see how markets are valuing Alcoa. Specifically, we’ll look at the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization), which is the preferred valuation metric for aluminum stocks.

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Comparative analysis

Alcoa is trading at 5.2x its 2017 consensus EBITDA and at 5.4x its consensus 2018 EBITDA. The stock’s forward multiples are the lowest among the companies that we’re covering this year. Century Aluminum (CENX) is the most expensive stock in our coverage of aluminum producers. The stock is trading at 11.4x its 2017 consensus EBITDA and 8.5x its consensus 2018 EBITDA. Norsk Hydro (NHYDY) has a forward EV-to-EBITDA multiple of 7.4x its 2017 consensus earnings and 6.2x its fiscal 2018 consensus estimates.

Rio Tinto’s (RIO) valuation multiples are also higher compared to Alcoa, as you can see in the above graph.

What to make of these numbers?

Valuation multiples are determined after taking consensus earnings estimates into account. According to estimates compiled by Thomson Reuters, Alcoa is expected to post an adjusted EBITDA of $2.08 billion in 2017 and $2.0 billion in 2018. The earnings estimates seem conservative looking at the current trend in commodity prices (ARNC).

While Alcoa looks fairly valued based on the valuation multiples, the earnings estimates might be conservative. If aluminum prices manage to hold onto their recent gains, analysts might want to take a fresh look at Alcoa’s earnings estimates.

Visit Market Realist’s Aluminum page for ongoing updates on the industry.

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