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Alcoa Inc. Earnings to Deliver More Good News for Hot AA Stock

Alcoa Inc (AA) is no longer in the Dow Jones Industrial Average and it isn’t really the global economic bellwether it was once thought to be, but Alcoa earnings — scheduled to drop Monday after the market closes — have made AA stock more interesting than ever.

Alcoa stock upstream AAAlcoa is transforming itself, and that’s done wonders for AA stock. No longer just a boring old materials play on aluminum, Alcoa stock now represents a stake in a value-added industrial company that makes high-tech products and alloys for the auto and aerospace markets.

That’s about as sexy as it gets when it comes to the aluminum and — thanks to a new acquisition — titanium business. And although AA stock is hardly in Hollywood territory for glamor, some sizzling outperformance and the still unknown effects of tumbling oil prices elevate the stakes in 2015.

On the energy front, it remains to be seen how the massive slump in oil prices works out on a net basis for Alcoa and AA stock. True, Alcoa is a huge user of energy, and lower oil prices should boost operating margins. Indeed, analysts at Morgan Stanley figure that every $10 change in the price of a barrel of oil equals a change of $80 million to $90 million in Alcoa’s operating earnings.

That sounds great, except that lower oil prices could also hurt demand for the lightweight, value-added products its rolling out to the automotive industry. There’s sure to be less demand for trucks built with lots of aluminum parts to improve fuel efficiency if gas prices keep dropping.

AA Stock Faces High Expectations

How that all looks to shakes out — as well as question regarding AA’s recent purchase of Tital, which makes titanium products for the aerospace industry — will surely be tackled in Alcoa earnings Q&A. Further capacity reductions at some smelters and the outlook for aluminum prices will also be on the agenda.

One thing we can say for certain now is that Wall Street has pretty tall expectations for Alcoa earnings in the most recent quarter.

On an adjusted basis, analysts expect Alcoa earnings per share to rise to 25 cents from 4 cents a year ago, according to a survey by Thomson Reuters. Revenue, on average, is forecast to grow a more-than-respectable 7.3% to nearly $6 billion.

The accelerating growth stems from AA’s continued expansion into the value-added market, especially in aerospace. Indeed, the acquisition of Germany’s Tital gives Alcoa access to European customers such as Airbus, the second-largest manufacturer of commercial aircraft.

True, much of this new-found enthusiasm is built into the AA stock price. Even after cooling off in December, shares are up more than 40% over the last 52 weeks. The broader market gained just 10% over the same span.

But there could very well be value left in AA stock. Shares go for less than 15 times forward earnings. That’s cheaper than the broader market and looks to be a steal given the long-term growth forecast of more than 35%.

There will be more moving parts than ever in Alcoa’s latest quarterly report, but the odds are that the good news will outweigh the bad, and the outlook will continue to argue for more upside ahead.

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

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