Alcoa (AA), the leading US-based integrated aluminum producer, has lost 8.9% so far in 2018 based on February 2 closing prices. Alcoa gained 91.2% last year, supported by aluminum prices. Aluminum prices gained 32.9% last year. While 2018 started off well for Alcoa and the broader aluminum space, Alcoa saw massive selling pressure after its 4Q17 earnings miss. Alcoa posted adjusted EPS (earnings per share) of $0.72 in 3Q17 and $0.14 in 4Q16. Alcoa’s 4Q17 earnings fell short of analysts’ top-line and bottom-line estimates. You can read about How Alcoa Fared in 4Q17 for a detailed analysis of Alcoa’s 4Q17 earnings and 2018 guidance.
Last week we saw a sell-off in equity markets. Alcoa lost 9.0% in the week ending February 2. Century Aluminum (CENX) and Alumina Limited (AWC) also saw a negative price action of 13.6% and 1.7%, respectively, in the week. South32 (S32) closed flat during the week. The SPDR S&P Metals and Mining ETF (XME), which invests in US-based metal and mining companies, fell 5.3% last week. While market sentiment impacts mining companies’ price action in the short term, they tend to track the underlying commodity prices in the medium to long term.
In this series, we’ll look at Alcoa’s outlook after a dismal January to help us understand what lies ahead for the stock in 2018. We’ll also look at Alcoa’s valuation to analyze how markets are valuing the stock given its risk-return tradeoff.
Let’s begin by looking at the recent trend in commodity prices.
Alcoa is valued at an enterprise value of 4.5x its 2018 consensus EBITDA and at 4.8x its consensus 2019 EBITDA.
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