Alcoa: 2019 Might Be the Real Test




As we noted previously, aluminum producers, including Century Aluminum (CENX), fell sharply last year and aluminum prices fell. Alumina was relatively strong in 2018 amid supply disruptions. While Alcoa (AA) stock also fell last year, its earnings were actually strong due to higher alumina prices (AWC). Analysts polled by Thomson Reuters expect Alcoa to post an adjusted EBITDA of $3.0 billion in 2018, which is ~30% higher than its 2017 EBITDA.

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Fourth-quarter estimates

Looking at the fourth-quarter estimates, Alcoa is expected to post revenues of $3.35 billion in the fourth quarter. The company posted revenues of $3.39 billion in the third quarter and $3.17 billion in the fourth quarter of 2017. Alcoa’s adjusted EBITDA is expected to fall to $717 million in the fourth quarter from $795 million in the third quarter.

While Alcoa’s fourth-quarter numbers don’t look that bad, the real test could be in 2019. Analysts expect Alcoa’s adjusted EBITDA to fall to $531 million in the first quarter of 2019. Although analysts expect the company’s EBITDA to rise in the following quarters, the estimates seem to be assuming higher aluminum prices from the current levels.

Key drivers

Falling aluminum prices (RIO) have dented Chinese aluminum smelters’ profitability. Later in 2018, Chinese smelters decided on capacity curtailments. The situation is particularly bleak for smelters that don’t have captive alumina refineries. The alumina-to-aluminum ratio is elevated, which hurts standalone smelters’ earnings.

While alumina has come off its highs and the alumina-to-aluminum ratio has come down, it’s still high compared to historical averages. Alumina prices might fall more in 2019, which could hurt integrated producers like Alcoa. Alcoa’s fiscal 2019 estimates appear to be on the higher side compared to other metal prices.

Next, we’ll discuss how analysts are rating Alcoa before its fourth-quarter earnings release.


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