Key Takeaways From Alcoa’s Third Quarter Results

by Trefis Team
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Alcoa (NYSE: AA) posted third-quarter revenue of $3.4 billion and EPS (Non-GAAP) of $0.63 per share, beating the consensus expectations on both fronts. The company reported a 14% increase in 3Q revenue on a year-on-year basis driven by tariffs, increased efficient operations, and higher sales of aluminum oxide (needed to make aluminum). Driven by the strong performance during the quarter, the company has raised its profit outlook for the financial year 2018 and has announced a $200 million stock buyback program as part of the capital allocation framework. Consequently, the company’s stock price has jumped almost 10% since the announcement of its results.

We have a price estimate of $43 per share for the company, which is 10% higher than the current market price. View our interactive dashboard –Q3 Earnings and Financial Year Expectations For Alcoa. You can modify the key drivers to visualize the impact on the company’s stock and come up with your own price estimate.


Key Highlights From Q3’18 Results

Alcoa reported an adjusted EBITDA of $795 million for the September quarter. Further, it posted a loss of $41 million for the quarter due to the previously announced actions on pension and other post-employment benefits (OPEB). The adjusted net income for this quarter was $119 million, down 58% sequentially as the company experienced lower aluminum prices, and a decline in aluminum product shipments, which was offset by higher alumina realized prices and favorable pricing for energy sales. The revenue was down 5% sequentially, primarily due to lower realized aluminum prices and decreased aluminum product shipments.

Alcoa finished the quarter with a cash balance of $1 billion. The company has reduced its net pension and OPEB liability to $2.2 billion at the end of Q3’18 from $3.4 billion at the end of Q3’17. By reducing liabilities and strengthening its balance sheet, we expect Alcoa to remain strong amid the volatile market and anticipated deficit in the alumina and aluminum market.

The company reported free cash flow of $206 million in this quarter and cash from operations was $288 million, both including $100 million contributions made to pension plans. Cash used for financing activities and investing activities was reported at $280 million and $83 million respectively, which includes $94 million for repayment of outstanding loans for economic development, thus ending the quarter with $0.8 billion debt.

Further, the company has announced a $200 million stock buyback program, depending on market conditions, cash flow availability, and other factors. The program does not have a predetermined expiry date and is intended for better capital allocation.

FY’18 Expectations

Alcoa had previously projected global deficit for both aluminum and alumina. The largest aluminum producer outside of China, Alcoa, expects a global deficit of 1.0 to 1.4 million metric tons of aluminum and a higher global deficit of 0.4-1.2 million metric tons of alumina. A deficit in these markets will result in a higher average realized price per ton shipment of alumina for the company in 2018.

Alcoa reported a 57% increase in the price of aluminum oxide (needed to make aluminum) in Q3, as a result of supply disruptions outside the world. Additionally, the company has announced its intention to close its two least productive aluminum plants in Spain and reorganize them into a single plant, which will produce both alumina and aluminum.

Based on the strong market trends, Alcoa expects an adjusted EBITDA, excluding special items, to be between $3.1 and $3.2 billion for FY’18. This represents a slight increase in the lower end of the previous guidance range of $3.0-$3.2 billion. The updated outlook reflects higher aluminum prices, regional premiums, cost of raw materials, and expected operational performance.


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