Leading US-based aluminum producer Alcoa (AA) has seen a selling spree this year, losing 18.5% of its market cap.
Alcoa isn’t the only metals and mining stock to underperform the broader markets this year. Steel and copper producers have also lagged amid concerns over China’s slowdown and the escalation in the US-China trade war.
Valuation and fundamentals
Let’s look at Alcoa’s valuation and fundamentals. Alcoa is valued at an enterprise value-to-EBITDA multiple of 3.4x its 2019 consensus EBITDA and 3.1x its 2020 expected EBITDA. These valuation multiples are based on its consensus expected EBITDA of $2.1 billion in 2019 and $2.3 billion in 2020. The company reported EBITDA of $3.1 billion last year. The expected fall in its 2019 and 2020 earnings isn’t hard to comprehend. Both aluminum and alumina prices have fallen this year, which will negatively affect Alcoa’s earnings. Even its 2019 consensus EBITDA looks to be on the high side considering the current pricing environment.
Given Alcoa’s depressed valuation multiples, these negatives seem to be priced in. Alcoa will realize some cost benefits after the Section 232 exemption for Canada. In the first quarter, Alcoa paid $32 million in tariffs on the aluminum it shipped from its Canadian smelters to the US, which translates into annual savings of almost $130 million. On the flip side, alumina prices should taper down as Norsk Hydro ramps up production at its Alunorte refinery.
The market seems to be turning pessimistic on Alcoa. Despite the known headwinds, though, Wall Street analysts have given Alcoa a mean consensus price target of $35.58, which represents a potential upside of 65% over its June 10 closing price. In our opinion, unless the US-China trade spat gets really messy, Alcoa seems to offer reasonable value at these prices.