Alcoa Inc. (AA, Financial) is slated to report its first quarter results for fiscal 2015. With the aerospace and automotive industries being its key end-markets and the company’s operations increasingly becoming downstream oriented, Alcoa’s earnings are likely to have an impact on the broader market gauges. The company competes with businesses such as Aluminium Corporation Of China Limited (ACH, Financial), Kaiser Aluminium Corp. (KALU, Financial) and the privately held Rio Tinto Alcan Inc. in various segments of the Aluminium industry.
Alcoa reported 14% growth in revenues to $6.4 billion in the fourth quarter of fiscal 2014 on the back of higher costs of aluminium as well as physical premiums. While the company’s non-GAAP earnings stood at an estimate-beating $0.33 a share, Alcoa logged GAAP earnings, including extraordinary expenses related to its business transformation program, of $0.11 a share. Following the results, Alcoa projected a robust FY2015 outlook, expecting strong demand from all but the packaging sector. Alcoa projected global aluminium demand in fiscal 2015 to grow 7%, while worldwide aerospace sales was projected to grow 9%-10% on the back of demand for regional jets, commercial jets and jet engines. Concurrently, the company forecast the worldwide automotive production to grow 2%-4% owing to factors such as lower lending rates and the growth of the Chinese middle class.
Strong automobile sector demand, European recovery to bsoost shipments
A major part of Alcoa’s revenues is generated through aerospace and automobile companies such as Boeing (BA, Financial) and Ford (F, Financial). Consequently, with Ford ramping up the production of its F-150 during the quarter, Alcoa is likely to benefit from strong demand for auto sheets. The company is also expected to log its highest-ever shipments of auto sheets during the first quarter, on the back of robust overall demand from the automobile sector. Further, given the strong demand for downstream products in the aerospace industry, the company’s acquisition of Firth Rixson in Q4 2014 is likely to have proven beneficial in increasing shipments. However, the said acquisition could also cut into Alcoa’s consolidated margins for the first quarter. Further, with Europe being Alcoa’s second-largest market, contributing one quarter of its overall revenues, the company’s Q1 results are also likely to benefit from the slight turnaround in the European economy, although that could be offset by negative foreign currency headwinds.
Business transition likely to help tide sluggishness in aluminium sector
Alcoa incurred extraordinary expenses to the tune of $273 million during Q4 2014 owing to its ongoing portfolio transformation program and the company’s restructuring exercise is likely to result in significant expenditure for the first quarter of 2015 as well. One of the primary features of Alcoa’s transformation has been its gradual shift towards value-added downstream products which experts believe will enable the company to tide over the overall sluggishness in the aluminium industry and fall in aluminium prices. This is likely to be true particularly for Q1 2014, when Alcoa expects volumes in its primary segment to be lower owing to the curtailment of several plants during the fiscal. For instance, in Q1, Alcoa curtailed 74,000 metric tons of smelting capacity in Brazil, which is expected to result in post-tax restructuring-related expenses of $10-$15 million for the quarter. The company is also currently in the process of exiting its high-cost facilities in Suriname and Jamaica.
Final thoughts
Although experts project positive Q1 growth for Alcoa on the back of strong midstream shipments and better margins in downstream sales, investors will be looking keenly at the management’s views on global demand for aluminium, which is widely perceived as a stand-in for the health of the global economy. Concurrently, though the company has been taking steps to restructure its business to tide the negative impact of aluminium pricing going ahead, the impact is likely to be seen more in the long term than the near term. Consequently, Alcoa’s shares are down 20.2% since its last earnings report, and experts opine that the company would have to report earnings of at least $0.25 a share on revenues of $6.09 billion to reverse the bearish trend. Alcoa shares have mostly traded in the $12-$16 range in the last three months and carry a price estimate of $13.07 a share, which is lower than its current price, and a "buy" guidance.
