In the previous article, we looked at some of Alcoa’s (AA) bearish drivers. However, while aluminum prices have fallen, alumina has built on its gains after the labor dispute at Alcoa’s Australia plants. As Alcoa is long on alumina, the company benefits from higher alumina prices. We also have the upcoming deadline on RUSAL sanctions. Earlier this year, the sanctions lifted alumina prices to an all-time high, while aluminum also rallied to seven-year highs.
To be sure, alumina prices should eventually fall as the alumina to aluminum ratio is way above its historical average. Although metal and raw material prices generally adjust themselves, it has been a different year for aluminum and alumina so far. While supply concerns have fueled an uptrend in alumina prices, traders have turned bearish on aluminum amid the US-China trade war scare.
Finally, we also need to look at valuations. Alcoa has an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) of 3.47x its 2018 consensus EBITDA and 3.84x its 2019 expected EBITDA. Century Aluminum (CENX) and Rio Tinto (RIO) have a 2019 EV-to-EBITDA of 3.94x and 5.71x, respectively. Analysts polled by Thomson Reuters expect Alcoa to post adjusted EBITDA of $3.1 billion this year and $2.8 billion next year. Alcoa’s valuation multiples are the lowest among the aluminum producers that we’re covering in the series.
Although Alcoa faces headwinds from the trade war scare, at these prices, it’s getting tough to hate the stock. Unless the trade war noise starts to impact global economic activity, Alcoa seems to be close to the bottom.
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