Morningstar | Alcoa Foiled by Lower Refining Profits in 1Q; Lowering FVE to $24 per Share From $27. See Updated Analyst Note from 18 Apr 2019
Although we expected Alcoa's refining profits to fall amid sharply lower alumina prices, the magnitude of the profit decline was greater than we anticipated in the first quarter. This was also due to lower profits from the company's smelting operations, as all-in aluminum prices fell on a sequential basis. We are concerned that, amid significant low-cost capacity additions from competitors in the Middle East and China, Alcoa's cost position on the global cost curve for smelting will continue to worsen. Indeed, the company hasn't shown its position on the cost curve as part of its earnings presentation since the third quarter last year. Having tempered our profit outlook over our five-year explicit forecast period, our fair value estimate falls to $24 per share from $27. Our no-moat rating is unchanged.Adjusted EBITDA for the alumina segment fell to $372 million from $683 in the fourth quarter. This was driven by a decline in realized alumina prices to $385 per ton from $479. Adjusted EBITDA for the aluminum segment was negative for the second straight quarter, declining to negative $96 million from negative $50 million. Bauxite profits rose modestly but still accounted for just 31% of companywide profits in the quarter. We don't expect a swift recovery for Alcoa, as the company also reduced its 2019 global aluminum demand outlook to 2%-3% from 3%-4%. We forecast demand closer to 2% this year.
Otherwise, the company reiterated its main guidance figures for 2019. For the full-year, we forecast adjusted EBITDA of $2.2 billion on sales of $10.8 billion, a 20% margin. We forecast ongoing margin contraction in the coming years, with adjusted EBITDA margins ultimately settling at 14% on a midcycle basis in 2023. Alcoa shares look modestly overvalued at current prices. Within the basic materials sector, we'd encourage investors to seek out industries that aren't as closely tied to Chinese fixed-asset investment, for which we maintain a negative outlook.
Alcoa is a vertically integrated aluminum company comprised of bauxite mining, alumina refining, aluminum production (smelting, casting, and rolling), and energy generation. Through direct and indirect ownership, the company has 30 operating locations in nine countries around the world, situated primarily in Australia, Brazil, Canada, Iceland, Norway, Spain, and United States.
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