Alcoa Earnings: Lower Alumina Prices and Tariffs Hit Earnings Hard

Key Morningstar Metrics for Alcoa

• Fair Value Estimate: $40
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

What We Thought of Alcoa’s Earnings

Alcoa AA reported second-quarter underlying income of USD 103 million, down 82% from the first quarter. This includes a 34% drop in realized alumina prices to USD 378 per ton and USD 115 million in tariff costs. Alumina and aluminum production were steady.

Why it matters: Sharp decline in the alumina price was the predominant driver of weaker earnings. But tariff costs were also worse than we allowed for, including a June tariff hike to 50%. We expected a benefit from redirection of Canadian aluminum to non-US customers sooner.

• We cut fiscal 2025 alumina margins to 24% from 38% to reflect decline in futures prices, though expect margins to recover to 34% by fiscal 2029 on cost deflation. We also anticipate improvement from aluminum as imports are redirected and current tariffs, which we view as unmaintainable, ease.
• We downgrade our fiscal 2025 EPS forecast by 57% to $1.65. Reduced alumina prices and persisting cost inflation at core. Our midcycle price forecast for $337 per ton from 2029 is unchanged, based on our assessment of the marginal cost of production.

The bottom line: We cut our fair value estimate for no-moat Alcoa by 6% to $40 on medium-term margin compression. Shares screen as undervalued. We think the market overstates the long-term impact of tariffs, which we see as temporary and manageable.

• We see long-term demand growth supported by the structural shift to electric vehicles which use considerably more aluminum than traditional vehicles due to weight considerations.
• However, we don’t think Alcoa has a moat, with earnings highly sensitive to volatile alumina and aluminum prices, and supply likely to respond quickly when incentivized. Large, low-capital-cost, Chinese capacity additions counter Alcoa’s operating cost advantages.

Between the lines: For tariff perspective, group EBITDA was down 64% to $321 million in the second quarter, with Alcoa incurring $115 million in tariffs on imports of Canadian aluminum to the US.