As we noted in the previous part, brokerages are still bullish on Alcoa (AA). Although some analysts have lowered Alcoa’s target price, the consensus estimates still suggest a strong upside for the stock from these levels. Looking at the headline valuation numbers, Alcoa is trading at a 2019 EV-to-EBITDA multiple of 3.6x. Based on the 2020 estimates, the EV-to-EBITDA multiple is 3.2x. Looking solely at these valuation multiples that are based on analysts’ consensus earnings estimates, Alcoa looks undervalued unless we’re heading for a full-blown recession in the next two years.
We also need to look at the earnings estimates. The earnings estimates drive the valuation multiples. Looking at the consensus earnings estimates compiled by Thomson Reuters, Alcoa is expected to post an EBITDA of $2.36 billion in 2019. The company posted an adjusted EBITDA of $3.1 billion last year. In 2018, Alcoa provided its annual EBITDA outlook during the quarterly earnings release. However, the company has stopped the practice in 2019.
Earnings are expected to fall
Analysts expect Alcoa’s earnings to fall in 2019, which isn’t surprising given the prevailing pricing environment. Having said that, the earnings estimates still appear elevated. Last year, Alcoa benefited from higher alumina prices (AWC) (RIO). The company reported average realized alumina prices of $493 per metric ton in the fourth quarter and $455 per metric ton in fiscal 2018. The company’s average realized alumina prices improved by $115 per metric ton between 2017 and 2018. The average realized alumina prices were the key driver of the company’s 2019 earnings.
Currently, alumina prices are sitting below $400 per metric ton. There appears to more downside than upside risk for alumina looking at the elevated alumina-to-aluminum ratio. Lower alumina prices appear to be the biggest downside to Alcoa’s 2019 earnings.
Next, we’ll discuss Alcoa’s outlook.