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Earnings Preview: Why the Long-Term Outlook of This Industrial Bellwether Is Positive

March 28, 2014 | About:

Alcoa (AA), the world’s third biggest aluminum producer and a bellwether of things to come is going to kick off the earnings season on April 8 by releasing its quarterly results. The company’s stock has outperformed the broader S&P 500 ,but its financial performance has been far from impressive.

While the company might struggle in the near term, its long term outlook appears positive. According to data compiled by Thomson Reuters, analysts are expecting 9.7% growth in Alcoa’s earnings in 2014 followed by 67.7% growth in 2015.

So far this year, Alcoa’s shares have risen by 19.56% and closed at $12.59 on May 28. The company has easily outperformed the S&P 500 which has risen by 0.4% in the corresponding period. Since Monday, Alcoa has risen by 4.8%.

The company’s recent rally can be party attributed to the release of its Ultra ONE truck wheel, which, according to the company, is the “world's lightest heavy-duty truck wheel.” The wheel is 47% lighter than a similar steel wheel and can create savings of up to 1,400 pounds per rig which could result in substantial fuel savings for the carriers.

The company has been trying to give a boost to its bottom line by creating products for niche markets. The aluminum giant has suffered on the back of the weakness in the commodity’s prices, which have remained at their lowest levels in more than four years.

Unlike its stock performance, Alcoa’s financial performance has not been impressive.

In its previous quarterly results announced earlier in January, Alcoa’s adjusted earnings dropped 5% from last year to $0.04 per share, which missed analysts’ estimates by $0.02 per share. Its revenues also dropped by 5.3% from last year to $5.59 billion on the back of a 3% decline in shipments of aluminum products. The revenues were around $170 million above expectations.

The contrasting performance of the company’s earnings and its shares is shown in the picture below.

Source: YCharts.

For the upcoming earnings release, analysts are expecting revenues of $5.58 billion, as per data compiled by Thomson Reuters. This would show a decline of 4.4% from the first quarter of the previous fiscal year.

Meanwhile, the company is expected to report earnings of $0.05 per share, which would show a significant decline from earnings of $0.11 per share a year earlier.

This is because analysts believe that the company could continue to suffer due to the oversupply issues in the aerospace industry and the weakness in aluminum prices.

So why have Alcoa’s shares risen despite the poor financial performance?

This is because Alcoa’s long term outlook appears better. In the previous earnings release, the company predicted a 7% increase in demand in 2014, which would be identical to 2013. The demand from China could grow by 10%, which would be a decline from the growth of 12% in 2013 while North American demand would increase by 5%. Brazil could also witness growth of 6% on the back of two major sports events: the 2014 FIFA world cup and the 2016 Olympics.

The aerospace industry could grow by between 7% and 8% in the current year. The two leading commercial aircraft manufacturers Boeing and Airbus have a massive backlog of more than 10,000 aircrafts, which is sufficient to sustain strong levels of aluminum demand through the next six to seven years. This could fuel Alcoa’s growth in the long term.

Similarly, the auto sector is reporting record levels of car sales which is an indication of high demand. Toyota (TM) could sell more than 10 million cars in the current fiscal year, and will likely continue to do so in the future. Other auto giants, such as General Motors (GM) and Volkswagen (VLKAY) are also nearing the 10-million-vehicle-sales-per-year benchmark.

The construction industry is also moving steadily towards its recovery. The housing sector has shown considerable improvements but so far, the commercial construction market has not taken off. However, the Architecture Billings Index, or ABI, has stayed above 50 during January and February. In other words, the demand for design and contractor services has grown in those two months. This shows that more commercial projects are now being planned.

Moreover, financial institutions have been reporting higher numbers of mortgages and loans for commercial construction projects. For instance, MetLife (MET) has reported a 19% increase in lending for commercial projects.

The economy is certainly heading in the right direction which could fuel Alcoa’s growth in the coming years.

About the author:

Sarfaraz A. Khan
Sarfaraz A. Khan is a capital market analyst and finance writer. His specialty lies in energy stocks. He also covers consumer goods, services sector, technology stocks, emerging markets and ETFs. His work appears on TheStreet, Seeking Alpha, Motley Fool and GuruFocus.

Visit Sarfaraz A. Khan's Website


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