What To Expect From Alcoa’s Fourth Quarter Results?

by Trefis Team
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Alcoa (NYSE: AA), a global producer of alumina, bauxite, and aluminum, will release its fourth-quarter 2018 results on January 16, 2019. The market expects the company to report revenue of $3.38 billion, 6.6% higher on a year-on-year basis. The Non-GAAP earnings for the quarter are expected to be $0.62 per share compared to $1.04 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 at Alunorte (the largest alumina factory), sanctions on Rusal, and a 10% tariffs on Chinese goods.

We have a price estimate of $42 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 – How Will Alcoa End 2018. You can make changes to our assumptions to arrive at your own price estimate for the company.

Key Factors Affecting Alcoa’s 4Q 2018 Results

The imposition of a 10% tariff (which could go up to 25% in 2019) on Chinese goods by the US government in September 2018, would likely lead to lower shipments of alumina and aluminum in Q4 2018. The US-China trade war has led to a lot of volatility in the prices of alumina and aluminum, which has also led to the stock shedding almost 50% of its value in a year. The supply deficit is also expected to be exacerbated by a 50% capacity cut at Alunorte Refinery in Brazil, which has reduced its alumina production capacity. Also, US sanctions on Rusal, which accounts for 14% aluminum production outside China, has affected supply. This would be offset to a certain extent with Alcoa successfully having ensured that the striking employees at its three mines in Australia are back at work. Considering all the factors, we continue to project a global deficit for both alumina and aluminum and see the bauxite market remaining in surplus with increasing stockpile.

We forecast a higher average realized price of $450 per ton of alumina and an average price of $2500 per ton of primary aluminum for 2018. Though the shipments would reduce due to decreased global supply, higher prices in both the commodities would drive alumina revenues up 32% and aluminum revenues higher by 11% in 2018, compared to FY 2017. Global excess supply of bauxite would drive prices lower as experienced in Q3 2018. A lower price would likely reduce revenue from bauxite by 25% in 2018. We expect higher alumina prices to help Alcoa report higher margins in 2018. The management has increased its adjusted EBITDA guidance, and we believe that the current market situation will help the company achieve its target for the year.

 

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