Investors who are looking for a beaten-down stock with the potential to outperform the market in the next 12 to 18 months should now consider Alcoa Inc (NYSE:AA).
Although revenue and profit expectations were low, given Alcoa’s upcoming business split, AA stock is nonetheless getting clobbered in premarket session Tuesday, falling as much as 7% after its third-quarter earnings missed Street forecasts.
It’s not time to panic, however, especially given that Alcoa’s Q3 profits actually rose. The New York-based company reported third-quarter net profit of $166 million, or 33 cents per share, up from $44 million, or 6 cents per share, in the year-ago quarter.
Analysts, however, were looking for 35 cents per share. The profit miss sent Alcoa stock, which closed Monday at $31.37, falling as low as $29.17 in Tuesday’s premarket action.
“Alcoa steered steady and showed resilience in spite of near-term market challenges,” CEO Klaus Kleinfeld said in a statement. “Profits grew in the combined Arconic segments, and Alcoa Corporation segments managed successfully to stay profitable in a low pricing environment. Productivity across the portfolio was exceptional, and paired with non-essential asset sales, further strengthened our cash position.”
What Does This Mean for AA Stock?
From my perspective, the aluminum and aerospace giant, which is set to enact its business separation on Nov. 1, has benefited from its recent cost-cutting measures and lower income tax provisions. The fact that earnings rose during the quarter on a 6% decline in revenue serves as evidence of strategic fiscal awareness. These maneuvers served to offset lower revenue, which the company had already telegraphed would be weak. This makes the negative reaction in Alcoa stock a head-scratcher.
Alcoa has been reducing its reliance on some traditional smelting operations as it boosts capabilities in higher-margin businesses. Plus, this just-ended quarter, during which Alcoa realized $377 million in productivity gains (across all segments), is the last quarter before Alcoa immerses itself entirely towards higher-end businesses such as aluminum and titanium alloys for the automotive, aerospace and construction industries.
Effective Nov. 1, Alcoa will spin off its upstream bauxite, alumina, aluminum and cast products business into a separate company to be named Alcoa Corporation, while the remaining portion of the company, which will consist of its value-added businesses will be combined in a company called Arconic.
The company reiterated its forecast that global automotive production will rise between 1% and 4% in 2016, while aircraft deliveries will be flat to up 3%. But both markets are poised to rise in 2017 by mid-single-digits.
Addressing these new markets is certain to boost AA stock, which prior to the earnings report was up 6% year to date. Combined with about $1.2 billion in gross proceeds Alcoa has earned from asset sales completed in 2016, AA stock is well positioned to return value to investors in the quarters and years ahead.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned stocks.
