Earnings season is almost upon us, and you’d better believe it’s going to open up some unique profit opportunities.
Today let’s review Alcoa (AA), which is among the first at bat for earnings. Will Alcoa knock analyst estimates out of the park, or is it set up to strike out?
Company Overview
Alcoa is a big name in the lightweight metals business, especially when it comes to primary aluminum, fabricated aluminum and alumina (aluminum oxide). Alcoa is the undisputed leader in producing aluminum, in part because it played a fundamental role in the widespread acceptance of the metal.
Alcoa operates in four segments: Alumina, Primary Metals, Global Rolled Products and Engineered Products and Solutions. Alcoa’s materials and engineered products are found in everything from aircraft to automobiles to consumer electronics. To date, aluminum represents the world’s second largest metals market, but as I’ll touch on next there is still plenty of room left to grow.
Earnings Outlook
Alcoa is known for marking the official start to earnings season. For the third-quarter reporting period, Alcoa will kick things off after the closing bell on October 8, and I can hardly wait.
Currently, the analyst community is calling for $0.18 earnings per share on $5.71 billion in revenue. While this translates to a 1% dip in revenue compared with Q3 2013, I’m more focused on the 63.6% forecasted earnings growth. The rest of the aluminum industry is headed for a 75.4% year-on-year drop in earnings!
Better yet, analysts have been raising their earnings-per-share targets, which suggests that analysts are having a hard time putting a ceiling on Alcoa’s profit potential. In the past 90 days, the consensus EPS estimate has jumped 29% from $0.14 to $0.18. Alcoa has a history of trouncing analyst estimates, having posted 50% and 80% earnings surprises for the past two quarters and looks to continue that trend.
I have October 8 marked on my calendar and recommend you do the same.
Current Ratings
AA stock has improved significantly in the past year — last September Alcoa was an “F-rated sell.” Since then, the stock has improved in terms of both fundamental health and institutional buying pressure.
Out of the eight financial metrics I graded AA on, it received “As” on three: Earnings Momentum, Earnings Surprises and Analyst Earnings Revisions. However, there is still work to be done on AA’s fundamentals.
Alcoa needs to improve its Sales Growth (D), Operating Margin Growth (F), Earnings Growth (C), Cash Flow (F) and Return on Equity (D). With Alcoa’s next earnings report just around the corner, I expect several of these grades to improve in short order. In the meantime, AA earns a “C” for its Fundamental Grade. AA also earns an “A” for its Quantitative Grade, which measures the current level of institutional buying pressure backing the stock.
As of this posting, September 16, 2014, I consider AA an “A-rated strong buy.”
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
