EUR 850.00 For Business Accounts Only

Morningstar | Alcoa Will Face Margin Compression as Favorable Aluminum Market Conditions Fade Into 2019 and Beyond

Alcoa's fourth-quarter earnings release closes out a successful 2018 for the firm. The company delivered $3.1 billion of adjusted EBITDA for the full year, a 27% increase from the prior year. The company benefited from favorable aluminum and alumina prices, but we don't expect prevailing market conditions to persist. Instead, we forecast materially lower pricing for both commodities amid decelerating demand growth in China and faltering cost support. Accordingly, we expect Alcoa's adjusted EBITDA margins will contract from 23% in 2018 to only 14% in a midcycle environment (2023).

To better reflect this outlook, we've lowered our fair value estimate to $27 per share from $31. Our no-moat rating is unchanged, as the company will be hard-pressed to deliver returns on invested capital above its weighted average cost of capital in a less favorable pricing environment. Shares are trading modestly above our updated fair value estimate, but the stock remains in 3-star territory.

Although management didn't provide adjusted EBITDA guidance for 2019, we forecast $1.72 billion on sales of $9.95 billion, a 17.3% margin. In 2019, the company plans to curtail two smelters in Spain totaling capacity of 124 thousand metric tons per year. Although this will incur sizable restructuring costs, this decision is expected to deliver a $70 million-$80 million benefit to the bottom line, beginning in the second half of 2019. This continues the company's long-running trend of rationalizing its production footprint in order to achieve lower unit costs. Although Alcoa's bauxite and alumina assets operate on the low end of their respective cost curves, its smelting assets are not cost-advantaged.