Previously in this series, we looked at recent trends in aluminum prices. In this article, we’ll see how markets are valuing US aluminum producers after last week’s sell-off. Specifically, we’ll look at the forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple.
Alcoa (AA) is trading at 4.2x its 2018 consensus EBITDA and at 4.5x its consensus 2019 EBITDA. The stock’s forward valuation multiples are the lowest among the aluminum producers we’re covering in this series. Norsk Hydro (NHYDY) and Rio Tinto (RIO) are trading at a 2018 EV-EBITDA of 5.1x and 5.6x, respectively. South32 (S32) is valued at 4.9x its 2018 expected EBITDA.
Century Aluminum (CENX) is trading at an EV-EBITDA of 7.5x its 2018 expected EBITDA and 4.9x its 2019 consensus EBITDA. The company has announced a plant restart and expects the incremental tons to add upwards of $75 million to its baseline EBITDA, assuming constant commodity prices. However, it would take time for the incremental earnings to reflect in Century Aluminum’s profits, as it takes substantial time to restart an aluminum smelter.
As we noted previously, aluminum’s downside looks limited from these levels. Both Alcoa and Century Aluminum look conservatively priced, based on aluminum market dynamics. Although the risk of more downside in aluminum prices can’t always be ruled out, it could be the time to get a little greedy on aluminum names as markets become fearful.
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