As noted in the previous articles, Alcoa’s (AA) forward valuation multiples are lower than some of the other aluminum producers like Century Aluminum (CENX), Rio Tinto (RIO), and South32 (S32). The company’s earnings estimate also seems to be on the lower side if one assumes the current commodity pricing environment (AWC) will prevail throughout 2018. However, there are two aspects that these headline numbers don’t reflect.
As of December 31, 2017, Alcoa had a net pension and OPEB (other post-employment benefits) liability of $3.5 billion. Although Alcoa’s on-balance-sheet liabilities was quite low, and its net debt was virtually nil, according to the most recent filings, we also need to look at the off-balance sheet liabilities. To put that number in context, Alcoa’s market capitalization as of February 2 was $9.1 billion. So, its pension and OPEB liabilities are slightly under 40% of its market capitalization.
Another concerning aspect could be the prevalence of “special” (or one-time) items in Alcoa’s earnings. Last year, the company reported $346 million of special items. Over the last couple of years, very few quarters have passed where Alcoa hasn’t reported special items in its earnings. While there is nothing wrong in reporting special items and it’s a normal practice to help investors compare earnings, the frequent occurrence of special items nullifies the “one-time” aspect of these expenses.
Having said that, both the restructuring-related costs and the pension obligations are legacy issues for Alcoa. In the next article, we’ll see how the company plans to address its legacy issues.
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