Alcoa's 1Q16 Earnings: Brace Yourself for Earnings Season
Alcoa’s 1Q16 earnings
Previously in this series, we looked at analysts’ estimates for Alcoa’s 1Q16 earnings as well as the guidance provided by Alcoa (AA). Now, we’ll look at some key metrics that you should watch for in the company’s 1Q16 earnings call.
EBITDA guidance
Last year, Alcoa gave 2016 EBITDA (earnings before interest, taxes, depreciation, and amortization) guidance of $1.7 billion for its EPS (Engineered Products and Services) segment. This was based on expected revenues of $7.2 billion at an EBITDA margin of 23%. During Alcoa’s 4Q15 earnings call, David Gagliano, an analyst with BMO Capital Markets, said that he expects the EPS segment to post EBITDA of only ~$300 million in 1Q16 based on Alcoa’s guidance. This would mean that the EBITDA run rate has to rise substantially in the remaining part of the year for Alcoa to hit its previously stated goals.
2016 guidance
It will be interesting to see what ATOI (after-tax operating income) guidance Alcoa provides for its EPS segment for 2Q16. Note that the EPS segment is Alcoa’s crown jewel and supplies components to the aerospace sector (ITA).
Analysts draw comparisons between Alcoa’s EPS segment and Precision Castparts (PCP), which was acquired by Berkshire Hathaway (BRK-B) last year. The graph above shows the comparable transactions for the PCP-Berkshire merger. Woodward (WWD), Barnes Group (B), and Constellium (CSTM) are also suppliers to the aerospace sector.
Along with the EBITDA guidance, Alcoa investors should watch for the EBITDA margins of Alcoa’s downstream business. In the next part of this series, we’ll explore the importance of EBITDA margins for Alcoa’s valuation multiples.
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