How Undervalued Is Alcoa’s Stock?

by Trefis Team
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Based on its current market price and future growth prospects, Alcoa (NYSE: AA) looks undervalued. Trefis has a price estimate of $25 per share for Alcoa’s stock, which is higher than its current market price of $21.60 as of December 24, 2019. This reflects an upside of ~16% from its current level.

To understand the major factors that are driving our stock price estimate for Alcoa’s stock, view the Trefis interactive dashboard – Alcoa Valuation: Expensive or Cheap? – and alter the key assumptions to arrive at your own estimate for the company’s stock price.

Company Overview

  • Alcoa is a large mining company engaged in alumina, aluminum, and bauxite mining.
  • Through its refining system, it processes bauxite into alumina, which is sold to its aluminum division and third-party customers.
  • Aluminum segment consists of Alcoa’s smelter system, along with the sale of by-products from the smelting process, such as aluminum powder and scrap.
  • The company’s global bauxite mining operations are located in Australia, Brazil, Guinea, and the company also has an equity stake in a mine in Saudi Arabia.
  • Its global competitors are: Rio Tinto, Rusal, BHP Billiton, Chalco, etc.

Estimating Total Revenues

  • Alcoa’s total revenues have registered a healthy growth from $9.3 billion in 2016 to $13.4 billion in 2018.
  • However, 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.

For detailed analysis on performance of each operating division of Alcoa and how Alcoa’s revenue growth compares with its competitors, view our interactive dashboard.

Estimating Net Income

  • After making losses in 2016, the company’s margins saw a sharp rise in 2017 and remained elevated in 2018, led by higher volume and price realization, along with cost effectiveness.
  • FY 2019 has been a difficult year as lower shipments are expected to adversely affect the company’s profitability as the total cost would be attributed to lower volume. Also, restructuring charges related to Spanish operations are also likely to affect margins, which are expected to drop to -0.8% in 2019, from 1.7% in 2018.
  • However, with an increase in revenue, major restructuring cost already incurred, and productivity savings from implementing the new operating model, margins are expected to improve to 2.1% in 2020.

Estimating Earnings Per Share

  • EPS has grown from -$2.19 in 2016 to $1.20 in 2018, and we estimate it to drop sharply to -$0.47 in 2019 before rising to $1.27 in 2020
  • EPS drop in 2019 can be attributed to lower Net Income, driven by lower revenue and a drop in margins, with a turnaround expected in 2020.

Share Price Estimation

As per Alcoa’s Valuation by Trefis, we have a price estimate of $25 per share for Alcoa’s stock. The stock price estimate is arrived using the discounted cash flow valuation technique, which you can find in Alcoa’s detailed financial model here. Based on projected EPS of $1.27 per share and a stock price estimate of $25 per share, Alcoa’ forward price-to-earnings (P/E) multiple stands at 20x.

To understand how Alcoa’s P/E multiple compares with its peers, view our interactive dashboard


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