Alcoa's Post-Split Valuation: A Look at the Drivers
Valuation multiples are a key metric. With the help of relative valuations, investors can assess a company’s valuation with respect to its closest peers’. For companies in cyclical industries such as aluminum, EV-to-EBITDA ( enterprise value to earnings before interest, tax, depreciation, and amortization ) is the preferred valuation metric. A forward EV-to-EBITDA multiple tells us how a company is valued for each dollar of EBITDA. In this part of the series, we’ll look at Alcoa’s (AA) forward EV-to-EBITDA .
Alcoa is currently trading at a premium to its trading multiple over the last five years, as shown in the chart above. Having said that, Alcoa’s current valuation multiples may not paint the complete picture. Alcoa will be splitting into two companies later this year. While one company will focus on Alcoa’s legacy commodity business, the other company will house Alcoa’s value-add components business. Both companies would have different comp sets after the split. While the commodity company will list Rio Tinto (RIO) and Century Aluminum (CENX) as its peers, the value-add company will compete with Precision Castparts and Woodward (WWD) for the aerospace component demand. You can read more about Alcoa’s impending split in our series Will Alcoa’s Splitting into 2 Companies Add Shareholder Value?
After the split, markets will value Alcoa’s commodity and value-add business separately. This should help in the price discovery of the two assets. The value-add company could command a premium comparable to that of the upstream company, considering the growth prospects and prevailing low commodity price (GSG) scenario.
There are several moving parts that could drive Alcoa’s post-split valuation. We’ll discuss some of these aspects in the next part of this series.
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