How Sensitive is Alcoa To The Changes In The Price of Aluminum?
Pres. Trump’s directed Section 232 investigation regarding the impact of import of commodities (steel and aluminum) on the U.S. national security has been sent for its final decision this month and the market is extremely anxious regarding the final outcome of the probe. Imports were at a record high in 2017 despite the various trade restrictions imposed by the U.S. government. The two major commodities under question are steel and aluminum and a positive resolution could have a significant impact on aluminum prices in the U.S and hence can create a significant value upside for Alcoa in the upcoming year. Aluminum had gained significant strength last year largely owing to the structural changes initiated in China and a generally favorable demand environment for the industrial metal.
Below we have created an interactive model which highlights the implication of a 1% change in the average realized price for aluminum assuming shipment stays constant. Per our analysis, we derive that a 1% growth in the company’s average realized price for aluminum results in a mere 0.2% upside to the current market price of the company. This trivial impact might be as a result of the fact that a lot of the upside has already been priced into the current stock price of the company. The earnings and P/E multiples are based on the consensus estimates from Reuters for 2018 and the model assumes that the forward P/E for the company remains constant.
In case you have alternate assumptions in contrary to our assumed revenue, net income margin, or PE multiple estimates, you can modify the same using our interactive platform to arrive at your own impact on the company’s valuation.
Have more questions about Alcoa? See the links below.
- Alcoa Q4 2017 Earnings Review: Higher Commodity Prices Supported Earnings Amid an Environment of Higher Input Costs
- Alcoa’s 2017 in Review
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