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Morgan Stanley: Expect A Q3 Beat From Alcoa

Morgan Stanley: Expect A Q3 Beat From Alcoa

Previewing Alcoa Corp (NYSE: AA)'s fiscal year third-quarter results, Morgan Stanley said it expects a beat from the company.

As such, the firm has an Overweight rating on the shares of Alcoa and a $47 price target.

The company is scheduled to report its third-quarter results after the market close on Oct. 18, 2017.

Analyst Piyush Sood indicated that he had raised his third-quarter EBITDA estimate to $532 million and earnings per share estimate to 80 cents, both of which are now above the consensus estimates (see Sood's track record here). Earlier, the analyst had expected EBITDA and earnings per share of $506 million and 70 cents, respectively.

Sood clarified that they key sequential boost to earnings was from higher aluminum price, lower alumina cost and improved performance in the bauxite segment, partially offset by weaker dollar and some cost headwinds.

See also: 3 Reasons Alcoa Is No Longer The Curtain-Raising Event Of Earnings Season

Morgan Stanley expects the beat relative to its expectations to come from higher energy sales and lower energy costs.

The firm expects spot EBITDA to be $2.6 billion compared to the 2018 consensus estimate of $2.1 billion and its estimate of $2.2 billion.

Giving the key takeaways from the firm's fifth Annual Laguna Industrials Conference last week, where it hosted Alcoa's chief financial officer Bill Oplinger, the firm said the restart of the Warrick smelter will yield $60 million in synergies with downstream.

The firm feels if the company can execute the land swap plan at Rockdale, transformation costs are likely to be lowered by $60 million. Even with a conservative five times multiple, the firm thinks both these initiatives can add $3 or 7 percent to the stock.

Based on the impression it got from the Laguna Conference, the firm said management will look to raise its debt rating above current levels before they renegotiate their revolver. The firm noted that Moody's recently upgraded the company's debt.

That said, the firm believes Alcoa is not planning to be an investment-grade company.

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Latest Ratings for AA

Oct 2019MaintainsOverweight
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