| An Investor’s Guide To Alcoa’s Net Income Sensitivity | |
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An Investor’s Guide To Alcoa’s 4Q14 Earnings (Part 11 of 16) (Continued from Part 10) Alcoa’s net income sensitivity
Previously in this series, we saw how various market factors impact Alcoa’s (AA) net income. Two of the most important market factors that affect Alcoa’s earnings are metal prices and currency movements. These factors also affect other aluminum companies like Constellium (CSTM), Century Aluminum (CENX), and Aluminum Corporation of China (ACH). The SPDR S&P Metals and Mining ETF (XME) can give you a diversified exposure to these and other companies without bearing the risk of owning individual stocks.
LME aluminum prices
The above chart shows the sensitivity of Alcoa’s net income to various factors. Alcoa is highly exposed to aluminum prices on the London Metal Exchange (or LME). However, Alcoa diversified itself from aluminum price volatility by moving to the alumina price index (or API) for its alumina, or aluminum oxide, segment.
Until 2014, Alcoa’s net income rose by $240 million if aluminum prices increased by $100 per metric ton (or MT). Similarly, its net income dropped by $240 million for every $100 per MT decrease in aluminum prices. Alcoa’s sensitivity to LME aluminum prices is expected to diminish in 2015, and the company expects its net income to be impacted by $200 million if aluminum prices move by $100 per MT.
Lower LME sensitivity
As Alcoa delinks its alumina segment from LME-based aluminum prices, its sensitivity to aluminum prices is diminishing. However, now its net income is sensitive to API. Alcoa expects its net income to rise by $20 million for every $10 per MT rise in API prices. Similarly, the company expects its net income to drop by $20 million if API prices fall by $10 per metric ton.
API prices are less volatile when compared to aluminum prices on the London Metal Exchange. The volatility in Alcoa’s earnings should come down as the company diversifies its fundamentals from aluminum prices.
In the next section, let’s analyze the outlook for Alcoa’s end markets in 2015.
Continue to Part 12 Browse this series on Market Realist:
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Aluminum Corp of China
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CODE : ACH |
ISIN : US0222761092 |
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ProfileMarket IndicatorsVALUE : Projects & res.Press releasesAnnual reportRISK : Asset profileContact Cpy |
Aluminum Corp of China is a producing company based in China. Aluminum Corp of China is listed in United States of America. Its market capitalisation is US$ 4.6 billions as of today (€ 4.8 billions). Its stock quote reached its highest recent level on September 14, 2018 at US$ 9.99, and its lowest recent point on October 14, 2022 at US$ 7.80. Aluminum Corp of China has 596 150 016 shares outstanding. |