Alcoa Upgraded As Commodities Gain Momentum

Alcoa Corp AA has reported beat results for Q4:16, with the revenue and EBITDA ahead of expectations.

Deutsche Bank’s Jorge Beristain upgraded the rating on the company from Sell to Hold, with a price target of $30.

Q4 Results

Alcoa reported headline loss of $125 million, which included pre-tax charges of $209 million, associated with restructuring, although the spinoff partly offset the situation with tax benefits of $33 million and a gain of $55 million from non-controlling interests.

The adjusted EPS, however, came in at $0.14, below the estimate and the consensus expectations.

“Rising commodity prices are proving to be a boon with the Alumina segment more-than-doubling EBITDA margins QoQ to ~$48/ton,” Beristain mentioned.

Alcoa reported beat adjusted EBITDA for Q4:16 at $335 million, driven by the better than expected performance of the alumina and bauxite segments.

Guidance

For 2017, management guided to EBITDA of $2.1-$2.3 billion, significantly ahead of the estimate.

Given that the spot prices are ahead of the estimates, the analyst does not expect the momentum to reverse in the short term, “especially if China idles capacity.”

In fact, Beristain believes that at spot prices, Alcoa might be able to generate free cash flow of $1.5 billion, which would be sufficient to retire all its net debt and pay down a third of its Unfunded Pension balance.

The company also increased its production guidance for bauxite, alumina and rolled products in 2017, while lowering the energy production guidance.

At last check in Wednesday's pre-market, shares of Alcoa were up 2.27 percent at $38.35.