Key Takeaways

Strategic refinancing and joint ventures are expected to enhance cash flow, reduce interest expenses, and stabilize revenue.
Low-cost production and market-responsive strategies could bolster margins and future earnings, adapting to global alumina price fluctuations.
Rising tariffs, fluctuating aluminum prices, and increased production costs are pressuring Alcoa's revenue, profit margins, and overall financial performance.

Catalysts

About Alcoa

Engages in the bauxite mining, alumina refining, aluminum production, and energy generation business in Australia, Brazil, Canada, Iceland, Norway, Spain, the United States, and internationally.What are the underlying business or industry changes driving this perspective?

The strategic financing activities, like the $1 billion debt offering in Australia used to refinance existing debt at lower interest rates, should decrease interest expenses and enhance net income.
Alcoa's joint venture formation with IGNIS EQT for the San Ciprián operations aims to resume production, potentially boosting revenue and stabilizing cash flow as production ramps up in line with market demands.
The company's low-cost position in alumina and potential benefits from alumina price support could bolster margins and adjust EBITDA if global prices rebound due to Chinese production constraints.
Alcoa’s execution of strategic initiatives, including the over-delivery on their $645 million profitability program, could enhance net margins through cost reductions and operational improvements.
The restart of the San Ciprián smelter aligned with commitments and the potential release of restricted cash could positively impact cash flow and capital deployment, enhancing future earnings potential.

Alcoa Earnings and Revenue Growth

Alcoa Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

Analysts are assuming Alcoa's revenue will grow by 2.3% annually over the next 3 years.
Analysts assume that profit margins will shrink from 6.7% today to 6.4% in 3 years time.
Analysts expect earnings to reach $864.9 million (and earnings per share of $3.33) by about May 2028, up from $847.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.3 billion in earnings, and the most bearish expecting $674.6 million.
In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.0x on those 2028 earnings, up from 7.7x today. This future PE is lower than the current PE for the US Metals and Mining industry at 20.6x.
Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 8.21%, as per the Simply Wall St company report.

Alcoa Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

The imposition of U.S. Section 232 tariffs has increased Alcoa's costs for Canadian aluminum exports to the U.S. by approximately $400 million to $425 million annually, with a net negative impact of about $100 million on the business, potentially affecting net margins and earnings.
Lower alumina prices, coupled with increased alumina costs, could reduce Alcoa's profit margins, particularly if Chinese refineries curtail output, further destabilizing market prices and affecting revenue.
The restart of the San Ciprián smelter is expected to incur significant costs, leading to a projected loss of $70 to $90 million in EBITDA and cash burn of $90 to $110 million in 2025, which can impact Alcoa's earnings.
Volatility and uncertainty in aluminum pricing, influenced by tariffs and changing market conditions, could hinder the anticipated improvements in Alcoa's revenue and profit margins as the Midwest premium has not risen as expected.
Increased raw material and energy costs, alongside unfavorable currency impacts, particularly if coupled with lower aluminum shipments, could pressure Alcoa's revenue growth and net income.

Valuation

How have all the factors above been brought together to estimate a fair value?

The analysts have a consensus price target of $36.619 for Alcoa based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $52.0, and the most bearish reporting a price target of just $25.0.
In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $13.6 billion, earnings will come to $864.9 million, and it would be trading on a PE ratio of 17.0x, assuming you use a discount rate of 8.2%.
Given the current share price of $25.19, the analyst price target of $36.62 is 31.2% higher.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.