Can Alcoa Beat Consensus For FY 2019 Amidst the Fall In Alumina And Aluminum Prices?

by Trefis Team
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Alcoa (NYSE: AA) is slated to release its Q4 and full-year 2019 results on Wednesday, January 15, 2020. Trefis details expectations from the Aluminum giant in an interactive dashboard, parts of which are highlighted below. We believe that Alcoa’s revenues for FY 2019 are expected come in line with consensus while earnings could beat expectations marginally – resulting in its stock price rising post earnings release. We expect Alcoa to report revenues of $10.5 billion (similar to consensus estimate of $10.5 billion), which is significantly lower than the previous year, primarily due to sharp reduction in alumina and aluminum prices. Additionally, earnings are likely to be around -$0.83 (slightly better than consensus estimate of -$0.87), which is a sharp reduction from the $1.20 reported in FY 2018, due to a combination of lower revenues, and expenses decreasing at a lower rate than revenues, weighing on net income margin. However, we believe that marginally stronger-than-expected earnings with revenue coming in line with consensus for FY2019 will likely result in Alcoa’s stock price (which has lost about 28% of its value in 2019) rising once earnings are announced. In fact, our forecast indicates that Alcoa’s Valuation is $25 per share, which is roughly 30% above its current market price.

A] Revenue to meet Consensus

  • Total revenue has increased at a CAGR of 20% over the previous two reported years, with the company adding about $4.1 billion to its revenue base between 2016 and 2018, primarily due to a sharp rise in alumina prices.
  • Trefis estimates Alcoa’s 2019 revenues to be $10.5 billion, marking a y-o-y decline of 21.4%, driven by decline across all three operating divisions – alumina, aluminum, and bauxite.
  • Alumina and Aluminum divisions are expected to take the maximum hit in 2019.
  • Alumina has been in excess supply from December 2018, which has, in turn, led to a drop in global price levels. Additionally, with an increasing number of aluminum players cutting down on capacity, demand for alumina was lower in 2019.
  • Though aluminum was in deficit in 2019, this 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.

A separate interactive dashboard for Alcoa details the trend in Alcoa’s total revenue and how each segment is performing, along with forecast for 2019 and 2020.

B] EPS to beat Consensus

  • Alcoa’s 2019 earnings per share (EPS) is expected to be -$0.83 per Trefis analysis, slightly better than the consensus estimate of -$0.87 per share.
  • A decrease in revenues as detailed above, coupled with a lower reduction in total expenses, along with a rise in shares outstanding will drive an EPS decline on a y-o-y basis.
  • Expenses are expected to remain elevated due to higher restructuring charges related to Spanish operations and higher cost per ton due to a drop in production.
  • 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 1.3% in 2020.

C] Stock Price estimate 30% higher than Market Price

  • As Alcoa is expected to make losses in 2019, we have used the price-to-sales (P/S) multiple to value the company’s stock.
  • A trailing P/S multiple of 0.5x looks appropriate for Alcoa’s stock, as opposed to the current implied P/S multiple of 0.3x.
  • Though Trefis’ forecast for Alcoa’s 2019 revenues is in line with consensus, its estimate for the P/S multiple is slightly higher than market expectations, working out to a fair value of $25 for Alcoa’s stock as opposed to the current market price of around $19.

Additionally, you can input your estimates for Alcoa’s key metrics in our interactive dashboard for Alcoa’s pre-earnings, and see how that will affect the company’s stock price.


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