Alcoa’s Valuation: Is There Scope for Multiple Expansion in 2018?

Alcoa’s valuation

In this part of our series, we’ll see how markets are valuing Alcoa (AA). Specifically, we’ll look at the forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple, which is the preferred valuation metric for metal and mining stocks.

Alcoa’s Valuation: Is There Scope for Multiple Expansion in 2018?

Comparative analysis

Alcoa is trading at 5.2x its 2018 consensus EBITDA and at 5.4x its consensus 2019 EBITDA. The stock’s forward valuation multiples are the lowest among the companies that we’re covering in this series. Century Aluminum (CENX) is the most expensive stock in our coverage of aluminum producers. The stock is trading at 8.9x its 2018 consensus EBITDA and 9.9x its consensus 2019 EBITDA. Norsk Hydro (NHY) and South32 (S32) have a one-year forward EV-EBITDAs of 5.9x and 6.5x, respectively.

What to expect

Alcoa’s valuation multiples could seem on the lower side if we look at the other aluminum producers (XME). Alcoa’s balance sheet looks strong since higher commodity prices have boosted its free cash flow profile. Going forward, the company could use its cash flows to further reduce its debt. A possible share buyback or dividend reinstatement could also be on the board’s agenda in the coming quarters.

Plus, aluminum market sentiment has improved considerably, as China’s commitment to cutting excess industrial capacity looks real. Although the cuts might not be as much as markets initially expected, they could still be handy in restoring stability to global markets.

Alcoa could see some valuation rerating this year with potential for multiple expansion this year if commodity markets show signs of stabilization.

In the next and final part of this series, we’ll see how analysts are rating Alcoa ahead of its 4Q17 earnings.