What To Expect From Alcoa’s Third Quarter Results?

by Trefis Team
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Alcoa
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Alcoa (NYSE: AA), a global producer of aluminum, will release its third-quarter results on October 17th, 2018. The market expects the company to report revenue of $3.35 billion, 12% higher on a year-on-year basis. The Non-GAAP earnings for the quarter are expected to be $0.50 per share compared to $0.72 per share reported a year ago. The lower EPS is likely to be the result of volatility in aluminum and alumina prices due to production curtailment in Alunorte (the largest alumina factory), Alcoa’s workers’ strike at its Australian plants, and a 10% tariffs on Chinese goods.

We have a price estimate of $43 per share for the company, which is higher than its current market price. Our detailed estimates for Alcoa’s key drivers that impact its price estimate are available in our interactive dashboard – Alcoa’s Outlook For 2018. You can make changes to our assumptions to arrive at your own price estimate for the company.

Key Trends Impacting Alcoa’s 3Q’18 Results

A 10% tariff on Chinese goods worth $200 billion was implemented by the US government on September 24th, 2018. This would result in lower shipments of aluminum and alumina for Alcoa in the remainder of 2018 outside the US. The tariff is expected to rise to 25% next year, which could again negatively affect the company’s stock price in the near term as a result of lower shipment volume. Further, there is a lot of volatility in the alumina and aluminum prices due to the trade war between the US and China. Weaker prices, coupled with lower shipments, are likely to weigh on the company’s bottom-line.

Late in this quarter, Norsk Hydro, a Norwegian Aluminum producer, announced a production halt in Alunorte, the world’s largest alumina factory outside China. While Alcoa had already projected a global deficit of aluminum and alumina in the last quarter, the production halt announcement, coupled with Alcoa’s Australian workers on strike in late September, worsened the deficit case, leading to a surge in aluminum prices and alumina prices. Aluminum surged to $2,240/ton and alumina to $640/ton. Now that Norsk Hydro plans to resume production at Alunorte at half capacity, and the strike at Alcoa’s Australian plant has ended in Concord, the prices have backpedaled to $2,023/ton and $535/ton respectively. Going forward, we expect the average price of aluminum and alumina for Alcoa to be $2,237/ton and $487/ton, respectively, in 2018.

Further, the smelter restarts announced in Alcoa’s Warrick operations earlier this year following the favorable market conditions, are not expected to achieve full production until 2019, thus hindering supply growth in the US. This is expected to weigh on the company’s operating margins for the current quarter as well as the remainder of the year. Furthermore, the US reached a last-minute accord on free trade with Canada and Mexico. However, this does not cover tariffs on aluminum and steel. Though this accord could provide some respite, Alcoa could experience lower shipment volume in 2018, which could affect its net income for the quarter and the remainder of the year.

 

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