What to Expect From Industry Peers After Alcoa Inc (AA)’s Earnings Beat

Peers

Shares of Century Aluminum Co (NASDAQ:CENX) and Noranda Aluminum Holding Corporation (NYSE:NOR) also popped up 3% a piece after this news. Despite persistently low aluminum prices, Noranda has been able to maintain profitability in its primary-aluminum business due to second quartile cash costs of its facilities. Nonetheless, the Street remains negative on the near- to medium-term outlook for aluminum prices and believes low prices will keep earnings and margins depressed.

The company could see some upside from improved non-residential construction demand in its primary-aluminum and flat-rolled divisions, but the non-res recovery is expected to continue to be slower than widely expected.

As far as liquidity is concerned, Noranda Aluminum Holding Corporation (NYSE:NOR) is not expected to face near-term liquidity concerns as its revolver is un-drawn and no significant debt payment is due for several years. However, the high debt level will remain an additional overhang on the stock, particularly if aluminum prices remain at current depressed levels.

The best aluminum player

Century Aluminum Co (NASDAQ:CENX) is best placed among the US aluminum producers in terms of: 1.) company-specific growth; 2.) company-specific cost savings potential from renegotiating power contracts; and 3.) relative valuation, with shares trading at 6.4x 2014 EBITDA estimates versus the other two US aluminum producers trading at 6.8x 2014 EBITDA.

Along these lines, subsequent to Q1 earnings, Century announced the acquisition of the Sebree aluminum smelter and a tentative power agreement at its Hawesville smelter, both located in Kentucky. I estimate the combined impact on Century EBITDA to be at least ~$70 million to $90 million, implying 2014 EBITDA potential now approaching $200 million (based on $0.93/lb aluminum price assumption) and a share price approaching $12 based on ~5.5x this potential 2014 EBITDA. 

Final word

Overall, the aluminum industry remains an uninteresting space unless incremental demand increases hit the industry and defeat the current oversupply issues. On a company-to-company basis, however, we do find some interesting stories. Century is seen as the best stock given its cheaper valuations and cost-reduction strategy, while a neutral stance on Alcoa and Noranda is predicated on declining aluminum prices balanced by improving end markets.

Zain Abbas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Zain is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article What to Expect From Industry Peers After Alcoa’s Earnings Beat originally appeared on Fool.com is written by Zain Abbas.

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