Alcoa’s Q4 Earnings Preview: Key Things To Consider (NYSE:AA)

Elevator Pitch

I rate Alcoa Corporation’s (NYSE:AA) stock as a Hold.

In my prior write-up for AA published on July 18, 2022, I determined that “an earnings miss is unlikely” when Alcoa Corporation announces its Q2 2022 financial results. I turned out to be right, as AA’s actual second quarter bottom line came in above the Wall Street analysts’ expectations.

With the current article, I offer a preview of Alcoa Corporation’s upcoming fourth quarter financial results, and evaluate how this event could potentially affect AA’s future share price performance. I consider the sell-side’s forecasts, management commentary, and relevant industry statistics as part of my analysis.

I lower my investment rating for Alcoa Corporation from a Buy to a Hold based on my expectations of a Q4 2022 earnings miss. But I don’t think that AA warrants a Sell rating, considering that its current valuations aren’t particularly demanding which in turn limits the downside for its shares.

The Q4 2022 Results Release Date For Alcoa

AA issued a media release at the end of last year, which indicated that the company will report its earnings for the final quarter of 2022 on January 18, 2023 after trading hours.

In the subsequent section of the article, I highlight how the market thinks about Alcoa Corporation.

AA’s Consensus Financial Figures

Alcoa Corporation’s expected financial performance for the fourth quarter of the previous year is poor, judging by the sell-side’s consensus financial projections obtained from S&P Capital IQ.

Analysts see AA’s YoY top line contraction widening from -8.3% in the third quarter of 2022 to a much more significant -20.0% for Q4 2022. Prior to Q3 2022, Alcoa Corporation had achieved strong positive revenue growth in excess of +14% for six consecutive quarters between the first quarter of 2021 and the second quarter of 2022 in YoY terms.

Wall Street predicts that Alcoa Corporation’s EBITDA margin will decrease from 26.8% for Q4 2021 and 7.4% for Q3 2022 to 4.0% in Q4 2022. The sell-side analysts estimate that AA’s EBITDA will decline by -48.9% QoQ and -88.0% YoY to $107 million for the final quarter of 2022.

AA is also expected to be loss-making for the second quarter running in Q4 2022. Specifically, the Wall Street analysts forecast that Alcoa Corporation will register a normalized net loss per share of -$0.57 for the fourth quarter of the prior year. In comparison, AA achieved a narrower net loss of -$0.33 per share and a positive net income of +$2.50 per share for Q3 2022 and Q4 2021, respectively.

Also, none of the sell-side analysts covering Alcoa Corporation lifted their Q4 2022 top line and bottom line projections for the company in the last three months. In fact, eight of the 12 Wall Street analysts, who have AA under their coverage, lowered their fourth quarter normalized earnings per share or EPS estimates for the stock.

On the surface, it will appear that the market’s expectations of AA’s Q4 2022 financial results are sufficiently low, and there shouldn’t be any negative surprises when Alcoa Corporation discloses its fourth quarter earnings next Wednesday. But I have a variant view, which I outline in the next section.

Alcoa’s Actual Financial Performance Could Fall Short Of Market’s Expectations

My opinion is that AA’s actual Q4 2022 financial results will be even worse than what the market is currently expecting.

At the Global Metals & Mining Conference hosted by Goldman Sachs (GS) on November 16, 2022, Alcoa Corporation acknowledged that “raw material costs” and “energy costs” have “stayed high.” In other words, AA’s cost pressures were still substantial, at least for the first half of Q4 2022.

AA’s management commentary relating to cost pressures is supported by industry data. A December 13, 2022 Goldman Sachs mining sector research report (not publicly available) titled “Five Investment Themes” cited industry statistics highlighting that mining companies’ cost pressures haven’t eased towards the end of last year. In this GS report, it is noted that energy costs haven’t “fallen to pre-Russia/Ukraine levels” in mid-December last year, while “many (raw material) consumables prices remain elevated” based on industry data.

In the preceding section, I noted that the Wall Street analysts are currently expecting Alcoa Corporation to deliver EBITDA and bottom line of $107 million and -$0.57, respectively for Q4 2022. My own prediction is that AA’s actual EBITDA and bottom line for the fourth quarter will be $70 million and -$0.90, respectively.

Below-expectations EBITDA and net loss for Q4 2022 might also lead to sell-side analysts lowering their 2023 financial forecasts for AA. This implies that there could be some pressure on Alcoa Corporation’s share price in the near term, following its earnings announcement next Wednesday.

Closing Thoughts

I have decided to reduce my rating for Alcoa Corporation from a Buy previously to a Hold now, in view of the expected Q4 2022 earnings miss. But a Sell rating for AA will be too harsh, as its current valuations are reasonably fair.

The current consensus sell-side price target for Alcoa Corporation translates into a modest -5.3% downside from AA’s current price levels. AA is trading at an undemanding 4.1 times forward EV/EBITDA now; this is derived based on dividing its current Enterprise Value by the average of its consensus EBITDA estimates for the FY 2023-2026 period.