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Alcoa Earnings Should Justify the Breakout in AA Stock

AA stock is up 27% in a little more than two months, as the worst of the downturn looks to be behind the aluminum giant


Aluminum giant Alcoa’s (AA) fourth-quarter results due out tomorrow could go a long way to supporting a nascent turnaround in Alcoa stock. Indeed, AA stock broke a long downtrend just a few months ago on expectations that the worst of declining revenue and earnings is behind the company.

aa-stock-alcoa-earningsAlcoa stock is no longer a member of the Dow Jones Industrial Average, but it’s still an unofficial benchmark for the start of earnings season. Furthermore, although AA stock is no longer the bellwether it once was, the Alcoa earnings report still offers clues into the state of global demand for basic materials.

Alcoa stock has been under pressure for years amid declining prices for aluminum. Intentionally slower economic growth in China, a sluggish recovery in the U.S. and outright recession in Europe have been weighing on demand and price.

Alcoa responded by shuttering smelters and cutting capacity, but soft aluminum prices continue to take their toll on the company’s operations and, by extension, Alcoa stock.

AA stock went into free fall in 2011 after trading near $18 a share. Alcoa stock spent most of 2012 and all of last year well below $10. Only recently did Alcoa finally break back above $10, and the company’s outlook will go a long way toward supporting that level.

Wall Street expects Alcoa earnings to come in at an adjusted 6 cents a share, or flat with the year-ago period. Revenue is forecast to slip to $5.4 billion from $5.9 billion in last year’s fourth quarter.

If nothing else, the company has done a good job tamping down expectations, having beat Street estimates for four straight quarters. Another quarter of better-than-expected earnings could give Alcoa stock a lift.

Alcoa Earnings Outlook Key for AA Stock

But the outlook — as always — is more important. The U.S. economy is supposed to accelerate this year, helped by stronger activity in the housing, manufacturing and auto industries, all of which would contribute to demand for aluminum.

Meanwhile, growth in Europe, while still weak, is picking up after emerging from recession last year. The company’s growth outlooks for key segments like aerospace, autos and China will be critical in helping to determine the trajectory of Alcoa stock after earnings.

A long period of cost cuts and restructuring has put the company’s net losses behind it, and aluminum demand can’t stay down forever. That bodes well for Alcoa stock in 2014 — although the deep-bargain trade might be past AA stock.

As InvestorPlace editor Jeff Reeves noted in September, Alcoa stock looked like a steal below $8.60 a share. That was an astute call; AA stock is up 27% since then.

Still, even if the quarterly results and outlook only confirm what the Street is betting on, that will go a long way toward justifying the current upswing in Alcoa stock. So tomorrow, if Alcoa beats estimates and offers a more optimistic outlook, there should be no looking back for AA stock.

As of this writing, Dan Burrows did hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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