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Morningstar | Alcoa Shares Rally on Solid Alumina Results and Encouraging Full-Year Guidance; $31 FVE Unchanged

Alcoa shares rallied after the company reported solid third-quarter earnings highlighted by strong alumina segment profits and encouraging full-year guidance. However, despite investors’ exuberant reaction to the quarter’s earnings result, we view shares as overvalued relative to our $31 per share fair value estimate for no-moat Alcoa.

In the third quarter, companywide adjusted EBITDA was $795 million, up from $582 million in the prior-year period. Across the company’s three segments, Alcoa's alumina operations reported the strongest quarter. The aluminum segment delivered soft results, driven by elevated production costs. Adjusted EBITDA for the alumina segment was up sharply year on year, as the company capitalized on high prices from a tight supply environment. Alumina adjusted EBITDA margins also surged to 37%, up from 14% last year. This increase in profitability was facilitated by Alcoa’s low-cost position on the 15th percentile of the global alumina cost curve.

Meanwhile, adjusted EBITDA in the bauxite segment was down about 5% from the prior-year period, as an industrywide surplus remained in place. With the market oversupplied, the near-term prospects for bauxite profit growth are muted. Adjusted EBITDA in the aluminum segment was down about 80% year on year, due to lower aluminum prices and significantly higher alumina costs. Alcoa’s aluminum operations have lost ground on the cost curve recently, which bodes poorly given our bearish long-term aluminum price forecast. Our bearish outlook stems from a below-consensus forecast for Chinese aluminum demand growth, paired with our expectation for continued global overcapacity.