Previously, we looked at the recent trend in commodity prices. In this article, we’ll see how markets are valuing Alcoa (AA). Specifically, we’ll look at the forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple, which is the preferred valuation metric for aluminum producers.
Alcoa is valued at an enterprise value of 4.5x its 2018 consensus EBITDA and at 4.8x its consensus 2019 EBITDA. The stock’s forward valuation multiples are the lowest among the aluminum producers that we’re covering in this series. With a 2018 EV-to-EBITDA multiple of 11.5x, Century Aluminum (CENX) is the most expensive stock among our select group of aluminum stocks. Rio Tinto (RIO) and South32 (S32) have one-year forward EV-to-EBITDA ratios of 6.08x and 6.01x, respectively.
We should read mining companies’ valuation multiples with caution. The metals and mining industry is cyclical in nature. Mining companies’ valuation multiples tend to bottom out near cyclical peaks, while they are the highest near the cyclical bottom. Furthermore, the forward multiples consider consensus earnings estimates, which are based on analysts’ expectations of metal prices (AWC).
Nonetheless, Alcoa’s valuation might look on the lower side when compared to other mining companies. Having said that, along with the valuation multiples, we also need to look at the earnings estimates that have been priced in while arriving at the valuation. In the next article, we’ll look at Alcoa’s earnings estimates and compare them to the company’s guidance.
As of December 31, 2017, Alcoa had a net pension and OPEB (other post-employment benefits) liability of $3.5 billion.
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