Alcoa (AA) is the leading US-based aluminum producer. On Wednesday, the company is scheduled to release its second-quarter earnings after the markets close. So far, 2019 hasn’t been a good year for Alcoa investors. The stock has lost almost 15% this year. Last week, Jefferies lowered Alcoa’s target price from $33 to $29, while J.P. Morgan lowered its target price from $52 to $46. Deutsche Bank went a step further and downgraded the stock from a “buy” to “hold” and lowered its target price from $35 to $23.
Looking at the macro picture
Before we look at Alcoa’s second-quarter earnings estimates, we’ll get a broad overview of the macro environment. Currently, London Metals Exchange cash aluminum prices are around $1,800 per metric ton. The prices have fallen nearly 4.0% this year. Alcoa’s bigger concern has been the sharp correction in alumina prices. Alumina prices saw a massive price correction after the prices spiked last year. The Alunorte closure and RUSAL sanctions sent alumina prices to an all-time high last year. Currently, alumina prices have fallen. Alunorte restarted its operations and there aren’t sanctions on RUSAL. Weak aluminum markets haven’t helped alumina either. China’s aluminum exports might set another record this year. After a record in 2018, China’s unwrought aluminum exports have risen 10.4% year-over-year in the first six months of 2019.
Alcoa is expected to post revenues of $2.75 billion in the second quarter. The company posted revenues of $2.72 billion in the first quarter and $3.6 billion in the second quarter of 2018. In the second half of 2018, Alcoa posted its highest quarterly earnings since it was listed as a separate company. Back then, higher alumina and aluminum prices lifted Alcoa’s revenues and earnings. Alcoa’s second-quarter revenue estimates look aggressive considering the weakness in alumina and aluminum prices. Alcoa missed the top-line and bottom-line estimates in the first quarter.
The analysts polled by Thomson Reuters expect Alcoa to post an adjusted EBITDA of $454 million in the second quarter. The company posted an adjusted EBITDA of $448 million in the second quarter and $905 million in the second quarter of 2018. Alcoa would save on the tariffs that it paid to ship aluminum from its Canadian smelters to the US. Since the announcement was made late in the second quarter, the impact might not be substantial this time. If we consider Alcoa’s first-quarter numbers, the company will see annualized savings of almost $130 million as a result of Canada’s Section 232 exemption.
Watch the free cash flows
In Alcoa’s second-quarter earnings, it will also be important to watch the free cash flows. While downgrading Alcoa, Deutsche Bank pointed to weakness in future cash flows. Markets would also watch Alcoa’s views on aluminum markets. During the first-quarter earnings release, Alcoa lowered its 2019 aluminum demand growth and deficit projections due to concerns about Chinese demand. The concerns increased over the last three months. The markets would also look at the progress in Alcoa’s share repurchase plan. During the first-quarter earnings call, Alcoa said that it still had $150 million under its share repurchase plan. The stock hit a 52-week low in May. So, the company might have expedited its buybacks.
Alcoa’s management might discuss some of the strategic actions it completed. Last month, the company announced that it would divest stake in the MRC (Ma’aden Rolling Company). Saudi Arabian Mining Company (Ma’aden) is the joint venture partner in MRC. Alcoa also announced the restart of its ABI smelter in Canada. The smelter operated at partial capacity for the last 18 months due to a labor lockout. The markets will watch the plant’s economics since aluminum prices are still subdued.
Earlier this month, Alcoa announced “that it has signed a conditional share purchase agreement with private equity investment firm PARTER Capital Group AG, based in Schindellegi, Switzerland, to acquire the Alcoa Avilés and La Coruña aluminum plants in Spain.” Alcoa has been streamlining its portfolio. The company has sold or idled several plants over the last decade.
Alcoa stock gained traction in June after a dismal May. Read Alcoa’s Mid-Year Review: Will the June Rally Continue? to learn more.