Alcoa: Analyzing the Selling Spree




As we noted previously, Alcoa (AA) saw a selling spree after its second-quarter earnings were released. Some observers attributed the fall to the negative impact from the Section 232 tariffs, which prompted Alcoa to lower its 2018 guidance. However, the actual impact from the tariffs is expected to be $72 million–$84 million in the second half of 2018. Alcoa expects higher energy costs of $50 million.

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Lower metal prices

Lower metal prices (RIO) drove Alcoa’s 2018 guidance cut. Alcoa’s current 2018 guidance assumes unpriced aluminum sales at $2,100 per metric ton and an API (Alumina Price Index) of $465 per metric ton. Alcoa’s previous guidance, which was released during the first-quarter earnings release, was based on assumptions of $2,300 per metric ton of aluminum and $500 per metric ton on the API.

What should you do?

What should investors do with Alcoa and Century Aluminum (CENX)? Currently, aluminum prices are below the levels that Alcoa assumed in its guidance. However, Alcoa expects a bigger deficit in aluminum markets compared to its previous projection. Notably, the spreads between cash and three-month aluminum contracts have widened, which reflects strong spot demand. A deficit should support aluminum prices. The prices seem to have hit the near-term low. Higher alumina and other raw material prices should also support aluminum prices in the near term.

The trade war is the biggest risk for Alcoa because it’s taking a toll on aluminum prices. However, the stock looks cheap based on its 2019 EV-to-EBITDA multiple of 4.0x. The valuation is based on the 2019 consensus EBITDA of $2.65 billion, which seems to account for lower aluminum prices.

While fundamentals appear to support Alcoa and aluminum, investors should watch for an escalation in the trade war.


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