Holding AA Stock Isn’t Just for Dreamers, Despite Thursday’s Drop

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Had it not been for an alarming full-year outlook, Alcoa Inc. (NYSE:AA) may have escaped earnings season unscathed.

That pesky aluminum supply/demand outlook offered along with the Alcoa earnings results, however, ended up torpedoing AA stock. All told, Alcoa shares lost more than 3% of their value on Thursday following Wednesday’s evening’s report.

As is always the case, however, there’s more to the story for current or prospective owners AA stock than can be gleaned from the headlines. Here’s the rest of the Alcoa earnings story.

Alcoa Earnings, By the Numbers

Yes, Alcoa topped operating earnings estimates of 26 cents per share by posting a profit of 28 cents per share of Alcoa stock. The beat obscures even bigger and better news, though. The aluminum company handily topped the year-ago bottom line profit of nine cents per share.

But yes, Alcoa also missed its revenue estimates of $5.94 billion, only generating a top line of $5.82 billion. Still, revenue was still up 7% on a year-over-year basis, verifying that the rebuilding/revitalizing effort continues to at least get some traction.

On divisional basis, engineered products drove a modest improvement in operating income, rolled products saw its income tumble more than 40%, Alcoa’s alumina business saw a nice upswing, while the primary metals division struggled.

None of it was surprising given the current currency environment and growing competitiveness from China. What did catch owners of AA stock a little off guard, however, was the drastic turnaround in the company’s predicted industry surplus for 2015.

What Up-Ended Alcoa Stock

As of its latest prediction, Alcoa now believes the aluminum industry will create a surplus of 326,000 tonnes this year, sharply reversing the prediction for an industry-wide deficit of 38,000 tonnes that Alcoa offered in its Q4 2014 earnings report.

Raised output from Chinese producers is the primary culprit for the forecast excess.

Some may believe the outlook may simply be the company’s way of setting the bar low for 2015 so it can play the role of hero by performing better than expected. And to be fair, a surplus of 326,000 tonnes is a strangely large number. However, it’s not an outlandish number given the longer-term supply/demand and aluminum price trends.

Though a precise number is difficult to pin down, some industry observers estimate that there’s more than 10 million tonnes of aluminum presently tied up in financing purgatory that could trickle into the market with or without warning. And that’s in addition to ongoing excessive production of aluminum in China … producers who have a subsidy-driven incentive to keep on producing regardless of demand.

In the meantime, after teasing investors with a recovery effort in the latter half of last year, the long-term aluminum price chart from Kitco Metals shows that aluminum prices are slumping again, nearing multi-year low levels.


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These low prices should concern owners of AA stock (or other aluminum stocks), as lower prices can ultimately mean crimped profit margins.

Bottom Line for AA Stock

Although the supply/demand outlook and the aluminum price trend paint a concerning picture, it must at least be acknowledged that Alcoa has been moving away from being a pure aluminum play that is at the mercy of the raw aluminum market. It’s moving toward a value-added/downstream strategy that can reasonably perform regardless of aluminum prices.

The decision to acquire titanium outfit RTI is one example of this transformation. The decision to keep shedding smelting capacity is another. It’s not yet where it may want to be, but it’s moving in that direction.

Sterne Agee’s Josh Sullivan may have summed it up best by saying:

“As Alcoa weathers a generational portfolio transformation under performing assets are being shed to improve overall profitability. AA beat Street estimates by $0.02 as the improving cost structure out paced expectations again; however, top-line revenues were below Street expectations. … [As] Alcoa executes on transitioning toward value-added products, we believe profitability will become more of a focus. … We continue to be constructive as Alcoa alters its cost structure and increases value-added products.”

In other words, don’t give up on Alcoa just yet. It may be down, but it’s not out.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/04/aa-alcoa-stock-earnings/.

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