A Look at Alcoa’s Valuations

Valuation

US aluminum producers such as Alcoa (AA) and Century Aluminum (CENX) are having a dismal year despite the Section 232 tariffs. Alcoa (AA) stock trades at a solid EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple of ~3.5x for 2018. Its 2019 EV-to-EBITDA multiple stands at ~4.0x.

Among the other aluminum producers, Century Aluminum (CENX) and Norsk Hydro (NHYDY) have 2018 EV-to-EBITDA multiples of 8.5x and ~5.7x, respectively.

A Look at Alcoa’s Valuations

Alcoa’s forward valuation multiples are based on its expected EBITDA of $3.1 billion in 2018 and $2.7 billion in 2019. The company’s adjusted EBITDA reached $2.3 billion last year. During its first-quarter earnings call, Alcoa’s 2018 EBITDA guidance was $3.5 billion–$3.7 billion.

However, the guidance assumed an LME (London Metals Exchange) aluminum price of $2,300 per metric ton and an API (alumina price index) of $500 per metric ton. Currently, the API and aluminum prices are lower than what Alcoa baked into its guidance. However, analysts’ earnings estimates seem to factor in the fall in metal prices.

Bullish drivers

Alcoa’s valuation looks attractive even with the recent fall in metal prices. The company’s strong financial position and efforts to address legacy issues such as pensions are expected to pay long-term dividends. However, in the short term, we can expect to see volatility as President Trump takes on China.

Furthermore, China’s aluminum exports have spiked this year as the country’s production continues to outstrip domestic demand. Please read US-China Trade Deficit Wobbles amid President Trump’s Tariffs for a detailed analysis of China’s May metals trade data.