What Is Ailing Alcoa’s Revenue Growth?

Despite revenues growing at a CAGR of 20% between 2016 and 2018, Alcoa (NYSE: AA) is currently witnessing a slowdown in demand for its primary products – alumina and aluminum – which could lead to revenues declining at a CAGR of 9% over the next two years. Thus, Alcoa is likely to lose $2.3 billion in revenue over the next two years, in contrast to a revenue gain of $4.1 billion over the previous 2-year period.

You can view the Trefis interactive dashboard – Alcoa Revenues: How Does Alcoa Make Money? – to better understand Alcoa’s revenue streams and performance. In addition, here is more Materials data.

Alcoa’s Business Model

3 Primary Segments

• Alumina: Consists of the company’s worldwide refining system, which processes bauxite into alumina, which is sold to its aluminum segment and third-party customers who process it into industrial chemical products.
• Aluminum: Consists of Alcoa’s worldwide smelter system, along with sale of by-products from the smelting process, such as aluminum powder and scrap.
• Bauxite: Consists of the Company’s global bauxite mining operations located in Australia, Brazil, Guinea, and the company also has an equity stake in a mine in Saudi Arabia.

Who is the Customer?

• Alumina: The majority of Alumina is shipped to third-party aluminum smelter customers or is sold to customers that process it into chemical products.
• Aluminum: The produced primary aluminum is used by Alcoa’s fabricating businesses, as well as sold to external customers, aluminum traders, and in the commodity markets. The sale of primary aluminum represents more than 90% of this segment’s third-party sales.
• Bauxite: Bauxite produced by the division is mainly sold to the Alumina division with the remainder sold to a number of third parties.

Competition

Alcoa’s business model faces stiff challenges and competition from offerings by its global competitors such as: Rio Tinto, Rusal, BHP Billiton, and Chalco.

Revenue Performance

• Alcoa has added $4.1 billion to its revenue base from 2016 to 2018, led by higher volume and elevated global price levels of alumina and aluminum, with both commodities being in deficit.
• For the full year, the company is expected to report revenue of $10.9 billion in 2019, marking a decrease of 18.4% over 2018, driven by lower alumina and aluminum volume sales and price realization.
• This is expected to be followed by a 1.6% increase in revenue to $11.1 billion in 2020, driven by a moderate turnaround in global commodity price levels and an increase in production volume.
• Overall, the revenue base is expected to shrink by $2.3 billion by the end of 2020.

Alumina Revenues

• Alumina revenue growth from 2016 to 2018 was led by higher demand from aluminum smelters and an increase in global prices.
• After a year of being in deficit, which led to alumina prices increasing significantly post Q1 2018, alumina has been in surplus (excess supply) from December 2018, which has, in turn, led to a drop in global price levels.
• With an increasing number of aluminum players cutting down on capacity, demand for alumina is expected to further decline in 2019.
• Lower price realization and volume is expected to lead to a drop in segment revenues over the next two years.

Aluminum Revenues

• Segment revenues increased till 2018 due to elevated price levels and higher production.
• Though the management forecasts a year of aluminum supply deficit, it is not reflecting in pricing due to a continuous rise in Chinese aluminum exports, which have led to a decline in global price levels.
• As increasing number of steel players are shedding capacity, and demand from automobiles being modest, China has increased its exports of semi products at a lower price, which has, in turn, led to a decline in primary aluminum products worldwide.
• Thus, lower shipments and prices are expected to lead to a drop in aluminum revenues in 2019, followed by a mild recovery in 2020.

Bauxite Revenues

• Bauxite revenues have remained flat over the last two years due to volume and price volatility.
• Segment revenues are expected to remain subdued over the next two years, as global prices are expected to remain under pressure with the seaborne bauxite market likely to see excess supply, as higher production in Guinea and Southeast Asia, will only partially be offset by higher demand in China.

According to Alcoa Valuation by Trefis, we have a price estimate of $30 per share for Alcoa’s stock. Our price estimate is higher than the current market price, as we believe that the company’s focus on improving its asset base, expectations of improving margins in 2020, along with the recently announced $200 million share repurchase program, would continue to support the growth in its stock price.

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