(NYSE: AA). Alcoa is somewhat unique, as the company has a long operating history but a short post-spinoff trading history, making peer comparisons more useful than historical multiple analysis. AA shares trade at price/sales ratio of 0.24, below the peer average of 0.76, and at a price/book ratio of 0.67, below the peer average of 1.36. We believe that these discounts are warranted given the company’s prospects for losses in both 2020 and 2021.
Alcoa recently reported a 3Q loss, though the loss was not as bad as the Street had feared. On October 14, Alcoa reported a loss of $49 million or $0.26 per share. Excluding special items, the adjusted net loss came to $218 million or $1.17 per share, better than the consensus loss forecast of $1.38 per share. Third-quarter revenue totaled $2.4 billion, down from $2.6 billion a year earlier. Adjusted EBITDA fell to $284 million from $388 million. However, adjusted EBITDA excluding special items grew 54% sequentially from 2Q20, primarily due to higher aluminum prices.
In 4Q20, Alcoa expects flat sequential results in the Bauxite segment. In the Aluminum segment, the company expects a sequential decline due to higher power costs in Europe, tariff pressures, and higher maintenance and seasonal labor costs, partially offset by the positive impact of the Intalco curtailment. It continues to project total bauxite shipments of 48.0-49.0 million dry metric tons, total alumina shipments of 13.6-13.7 million metric tons, and total aluminum shipments of 2.9-3.0 million metric tons.
EARNINGS & GROWTH ANALYSIS
Alcoa reports results for three business segments: Bauxite, Alumina and Aluminum. In the Bauxite segment, 3Q20 adjusted EBITDA was $124 million, down from $134 million a year earlier. In Alumina, adjusted EBITDA fell to $119 million from $223 million. In the Aluminum segment, adjusted EBITDA rose to $116 million from $43 million in the prior-year quarter.
In response to COVID-19, the company reduced capital expenditures by $100 million, and delayed nonregulated environmental spending and asset retirement obligations (ARO) . It also deferred $220 million in pension contributions in the United States under the CARES Act.
FINANCIAL STRENGTH & DIVIDEND
Cash from operations in 3Q20 was $158 million. Cash from financing activities was $692 million, primarily related to the issuance of debt, and cash used in investing activities was $78 million. Free cash flow was $84 million. The company had $1.74 billion in cash and total debt of $2.5 billion. Debt accounted for 34% of total capitalization.
Alcoa has a $200 million stock buyback program.
MANAGEMENT & RISKS
He joined Alcoa in 2002 and was previously the president of the company’s Global Primary Products business. William Oplinger is the CFO.
The company’s strategy is to become a lower-cost, competitive commodity supplier by optimizing its portfolio and disposing of noncore assets. Alcoa is also planning to defer approximately $900 million in 2020 by cutting costs and deferring pension contributions into 2021. On January 31, Alcoa completed the sale of its Gum Springs, Arkansas waste treatment facility to Veolia ES Technical Solutions for $250 million. On December 31, 2019, it completed the transfer of the Afobaka hydroelectric dam to the government of Suriname.
There is no guarantee that management will achieve its goal of becoming a low-cost, competitive commodity supplier.
The company is based in Pittsburgh, and has approximately 13,800 employees.
We think that AA shares are fairly valued at recent prices near $13, toward the low end of their 52-week range $5-$24. From a technical standpoint, the shares have been in a bearish pattern of lower highs and lower lows that dates to August 2018.
To value the stock on a fundamental basis, we typically use peer and historical multiple comparisons. Alcoa is somewhat unique, as the company has a long operating history but a short post-spinoff trading history, making peer comparisons more useful than historical multiple analysis. AA shares trade at price/sales ratio of 0.24, below the peer average of 0.76, and at a price/book ratio of 0.67, below the peer average of 1.36.
On October 16, HOLD-rated AA closed at $12.62, up $0.32.