Here’s Why We Have Revised Our Price Estimate For Alcoa To $58

by Trefis Team
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President Trump’s latest U.S. tax reform has led to a recent surge in the U.S. stock market largely due to a favorable impact seen on the valuation of companies operating in the U.S as a result of a more desirable tax rate. The same reasoning has led us to revise our price estimate for Alcoa to $58.

As per the new tax bill, the corporate tax rate will be lowered to 21% from the existing rate of 35%. In our valuation model, we had previously estimated Alcoa’s effective tax rate to converge with the statutory tax rate of 35% over our forecast horizon. However, with the recent change in the statutory tax rate from 35% to 21%, we have lowered our long term estimate of the company’s effective tax rate to 21%.

A fall in the tax rate lowers the tax burden on the company and enhances its net income and subsequently its free cash flow. Our price estimate for Alcoa is based on a discounted cash flow (DCF) model and hence, an increase in the estimate of future free cash flow has led us to a revised price estimate of $58 for the company. We have created an interactive model that details how changes in effective tax rates have impacted the valuation of  Alcoa. You can change these assumptions to arrive at your own price estimate for the company.

Furthermore, we have revised our full year 2018 financial estimates for Alcoa based on the latest outlook disclosed by the company in its fourth quarter and full year 2017 earnings release. These factors had a marginal impact on the revision of the stock price as our previous estimates were closely in line with the latest outlook released by the company.

Have more questions about Alcoa? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Alcoa

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