Key Takeaways From Alcoa’s Q4 2018 Results
Alcoa (NYSE: AA) released its Q4 2018 earnings results and conducted a conference call with analysts on January 16, 2019. In line with expectations, the full year revenue was higher by 15% compared to 2017, driven by higher average alumina and aluminum prices. A decline in prices of both these metals towards the end of the year, affected Q4 revenues, which were down 1% compared to Q3 2018 revenue. Adjusted EPS at $0.66 for Q4, met the analysts’ estimates, though it dropped year-on-year from $1.04 in Q4 2017, primarily due to lower aluminum prices and a decrease in the price of energy sales in Brazil.
We have summarized Alcoa’s Q4 2018 earnings along with the major takeaways from the announcement and estimated the sales and earnings for 2019 in our interactive dashboard – Alcoa’s Q4 2018 Financial Performance.
Alumina and Aluminum Prices were the Major Factors in Q4
The last quarter of the year saw refinery expansions in China. Also, lower than previously expected smelting production due to environmental and economic factors have led to the end of the alumina supply deficit. The expectation of an alumina surplus in 2019 led to a drop in prices for the metal. Weak consumption and economic data from China, along with less severe winter cuts compared to the previous year also led to a fall in aluminum prices in Q4. Alumina sales were marginally higher (2.8% Q-o-Q growth) at $1,132 million, mainly driven by higher shipments. However, primary aluminum revenues saw a decline of 3.3% compared to Q3 2018 due to fall in prices as well as shipments. These were the primary factors for Q4 revenue to decline by 1.4% y-o-y to $3.34 billion. Adjusted EPS of $0.66 was marginally higher than Q3, but quite low compared to $1.04 in Q4 2017. Lower metal prices and lower earnings from the company’s Brazil hydro assets adversely affected its earnings in Q4.
For the full year, Alcoa’s revenue came in at $13.4 billion, 15% higher than 2017 revenue, mainly benefiting from higher metal prices during the first nine months of the year. For 2019, we expect bauxite to remain in surplus due to continuously rising exports from Australia, Guinea, and Indonesia, which would keep bauxite prices subdued. Alumina prices are expected to witness a further decline as we forecast a global surplus for the metal. However, aluminum is expected to remain in deficit for another year as lower margins have led to economic curtailments in China and globally. This would likely provide support to aluminum prices in 2019.
Due to the above factors, in line with market expectations, we project a marginal decline in total revenues for Alcoa in 2019. Net income margin and EPS are expected to remain flat at 1.7%, driven by higher aluminum margins on the back of lower alumina prices (which is an input for the aluminum segment).
We believe that given its second full year of operation as an independent listed company, Alcoa has performed well in the face of extremely volatile commodity prices and an uncertain global economic, political, and regulatory climate. Going forward, the company plans to focus on improving its asset base and reducing cost. Also, the recently announced $200 million share repurchase program (of which $50 million worth of shares have been repurchased) would continue to support the growth in its stock price.
We have a $42 price estimate for Alcoa, which is currently higher than its market price.
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