Alcoa (AA, Financial), the New York-based and freshly publicly listed $7.6 billion aluminum company, reported 23.9% year over year revenue increase to $5.51 billion and profits of $446 million (8.1% margin) in the first half of the year compared to (-)$227 million a year earlier.
Despite the 5.8% increase in total costs and expenses of operations to $4.86 billion, Alcoa still registered profits in the first half.
As a production leader in several materials including aluminum, Alcoa has increased its 2017 forecast for global aluminum demand growth to a range of 4.75% to 5.25%. Further, the company maintained its expectation for a modest global surplus between 300,000 and 700,000 metric tons in global aluminum.
“Alcoa generated solid profitability in the second quarter with strong cash flow that grew our cash balance to more than $950 million.
“Through the first half of the year, our adjusted EBITDA topped $1 billion, and we expect improvements in the second half of 2017, despite higher input costs.
“We are pursuing a simple set of strategic priorities to reduce complexity, drive returns and strengthen the balance sheet, and we will continue to base each of our decisions on these three key levers for the benefit of our stockholders.” – Roy Harvey, president and CEO
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Valuations
Alcoa is overvalued compared to peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 48.6 times vs. the industry median of 18.3 times, a price-book (P/B) ratio of 1.25 times vs. 1.96 times and a price-sales (P/S) ratio of 0.7 times vs. 1.74 times.
The company does not have a trailing dividend yield.
Average fiscal 2017 revene and earnings-per-share estimates indicated forward multiples 0.67 times and 14.4 times.
Total returns
Alcoa has provided 47.22% total gains for its shareholders so far this year compared to Standard & Poor's 500 index's 10.39%.
Alcoa Corp.
Alcoa Corp. became an independent, publicly traded company on Nov. 1, 2016. As part of Alcoa's separation transaction, Arconic retained 19.9% of the outstanding shares of common stock of Alcoa.
Further, Alcoa is a global industry leader in the production of bauxite, alumina and aluminum, with a strong portfolio of value-added cast and rolled products, as well as substantial energy assets.
Aluminum is a commodity traded on the London Metal Exchange and priced daily. Additionally, alumina is subject to market pricing against the Alumina Price Index. As a result, the price of both aluminumand alumina is subject to significant volatility and, therefore, influences Alcoa's operating results.
Alcoa is a global company with 43 operating locations across 10 countries. In 2016, Alcoa generated 47% of its revenue in the U.S., 29% in Spain, 18% in Australia, 5% in Brazil, 2% in Canada and the remaining in other countries.
Effective in the first quarter, Alcoa had three segments: Bauxite, Alumina and Aluminum.
Bauxite
In the first half, revenue from bauxite rose 18% year over year to $577 million (9% of total sales) and generated an adjusted EBITDA margin of 36% (most profitable in all three segments); same level of profitability compared to a year ago.
In addition, bauxite production increased by 1% in the six-month period. According to filings, production in the second quarter alone declined by 1% brought by a force majeure event (labor unrest) at the mine in Guinea, which has since been resolved.
Alumina
Revenue in alumina increased 30% to $2.23 billion (34% of sales) and generated margins of 24% compared to 8% a year earlier.
Alumina production in the first half decreased by (-)3% year over year largely attributable to the absence of production from the remaining operating capacity at the Point Comfort (Texas) refinery (2,305 kmt per year). According to filings, the higher adjusted EBITDA for Alumina segment was mainly related to the higher average realized price per metric ton, about 29% to $319, in the recent half.
Aluminum
In the first half, revenue in the aluminum business rose 19% year over year to $3.8 billion (largest; 58% of sales) and generated 11% margin, similar to its year prior level of profitability.
Further, primary aluminum production (kmt) declined (-)5.1% year over year while average realized third-party price per metric ton of primary aluminum increased by 16.7% to $2,141.
Sales and profits
In the past three years, Alcoa registered an average revenue decline of (-)9.5%.
Cash, debt and book value
As of June, Alcoa had $954 million in cash and cash equivalents and $1.44 billion in debt with debt-equity ratio 0.24 times compared to 0.74 times a year earlier. Overall equity declined by $6.4 billion year over year while debt declined by $7.65 billion.
Alcoa also had $3.47 billion in accrued pension benefits, other postretirement benefits and asset retirement obligations in its liabilities in the period.
Meanwhile, no goodwill nor intangible assets were recognized in Alcoa's $16.93 billion assets while book value declined (-)43.6% year over year to $8.2 billion.
Cash flow
In the first half, Alcoa generated $385 million in its cash flow from operations compared to (-)$441 million in the same period last year. Positive cash flow existed secondary to the company's profitability in the period.
Capital expenditures were $159 million leaving Alcoa with $226 million in free cash flow compared to (-)$613 million free cash outflow a year prior. The company provided 68.6% of its free cash flow in distributions to noncontrolling interest while having received $56 million in contributions. Alcoa also reduced its debt by $10 million in the period net any issuances.
The cash flow summary
In the past three years, Alcoa allocated $1.24 billion in capital expenditures, reduced its debt by $1.09 billion (net repayments and other financing activities) and generated $167 million in free cash flow.
Conclusion
Alcoa's recent operations indicated a strong overall turnaround in its business. Looking at per product production basis, though, indicated interesting results. As mentioned earlier, the company has actually recorded lower production basis but recognized higher revenue and profits brought by higher overall realized prices for the metals.
Meanwhile, Alcoa has a solid balance sheet absent any goodwill/intangible elements, but with a good amount of retirement-related liabilities. The company also has yet to provide any shareholder payouts (dividends and share repurchases) after becoming an independent company last year.
Analysts have an average overweight recommendation on Alcoa stock and a target price of $41.45 per share vs. $41.15 at the time of writing.
Bound by metal price(s) cyclicality, selling realizing some profits in Alcoa after nearly a year post-IPO would be prudent.
Disclosure: I do not have shares in any of the companies mentioned.
