The aluminum industry is shrinking and so is Alcoa Inc (AA), so when Alcoa earnings land on Monday, all we can hope is that the AA shrink-to-grow strategy is working.
After all, Alcoa earnings and sales are going to tumble by design.
Metals prices are in freefall now that the commodity super-cycle has come to an end and the Chinese economy is slowing down at an alarming rate. The only thing left for materials companies like AA to do is to slash production.
Just days after we rang in the new year, AA said it is shuttering one of the largest aluminum smelters in the country, and idling production at an alumina refining plant.
AA’s moves will cut total U.S. aluminum output down to levels last seen in in the years following World War II, and yet it may still not be enough to bring stability to prices. After all, AA is coping with a drop of nearly 30% in prices in the last year alone.
Cutting back on production and costs takes a bite out of any company’s top and bottom lines. That’s why the best investors can hope to see in Alcoa earnings is results that top Wall Street estimates, because they’re sure not going to show growth.
AA Earnings, Sales Set to Tumble
For the last three months of the year, analysts, on average, expect AA to report earnings per share of 4 cents, according to a survey by Thomson Reuters. That’s a decline of 88% from the 33 cents a share earned in the year-ago quarter.
Revenue is likewise going in reverse. Sales are forecast to fall more than 16% to $5.34 billion, from $6.38 billion a year ago.
Of course, expectations are everything when it comes to earnings season, and the Street just might be pessimistic enough that Alcoa earnings can beat estimates. After all, current EPS estimates are less than half of what was expected just three months ago, according to Zacks Equity Research.
Be that as it may, the real star of earnings season will be the progress AA is making on cleaving itself in two. This is the year that Alcoa intends to split off the slow-growth, low-margin upstream business from the faster-growth, higher-margin downstream business.
The market tends to like these kinds of moves, which is why they’re in fashion in these days of sluggish growth. In just the last year, we’ve seen General Electric (GE) disposal of GE Financial, eBay (EBAY) spin off PayPal (PYPL) and the Dow Chemical (DOW) deal with DuPont (DD) to merge and then split into three separate companies.
As much as such a split makes sense, it hasn’t done anything for Alcoa stock since it was announced three months back. Indeed, AA stock has lost about 14% since then and has lost half its value of the last 52 weeks.
Bottom Line for AA Stock
Better-than-expected results could reverse the latest slide in Alcoa stock, but for how long?
The miserable macroeconomic picture and uncertainty surrounding the split are going to be the dominant themes, at least through the first half of 2016.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
