Alcoa Inc (AA): Alcoa Stock Takes a (Small) Step Forward

Alcoa Inc (NYSE:AA) kicked off the second-quarter earnings season after Monday’s close by unveiling last quarter’s numbers after Monday’s close. They were good … good enough to send AA stock higher to the tune of 4% in after-hours trading.

The operational bottom line of 15 cents per share of Alcoa stock was better than the anticipated profit of 10 cents per share, while revenue of $5.3 billion edged analyst expectations of $5.2 billion.

Still, the top line fell 10% on a year-over-year basis, while the bottom line was nearly cut in half from the 19 cents per share of AA stock reported in the same quarter a year earlier.

Alcoa stock may be currently be digging its way out of a hole, but it has a lot more digging to do.

Alcoa Earnings

Last quarter’s GAAP net income of $135 million, or 9 cents per share, ramps up to the aforementioned 15 cents per share, or $213 million, when removing one-time expenses from the mix. But the numbers are weaker on a year-over-year basis, even if they’re up on a sequential basis.

Weak aluminum and alumina prices were the culprit. Aluminum ended the calendar quarter at a price near 75 cents per pound, up from 66 cents per pound as of the end of Q1. But aluminum prices spent all of Q2 2016 below the Q2 2015 closing price of 75 cents per pound; the year-over-year comparison isn’t an entirely fair one.

The 10% sales lull could have been worse, however. Had acquisitions not beefed up the bottom line by 4%, revenue would have rolled in 14% lower.

It’s also noteworthy that alumina shipments, by ton, were down 15% from Q2’s tally, while aluminum shipments were off by 8%; better pricing wouldn’t have helped much. All the same, alumina prices and aluminum prices rose 22% and 2%, respectively, during the quarter, and are still trending upward.

As for the value-add segment that will be called Arconic (once the split of the old-school aluminum supplier and the new-school specialty metals business is complete), the results and outlook remain bright. Revenue was up 1% to $3.5 billion for this unit, led by the 15% year-over-year growth of engineered products. This division’s after tax operating income reached $294 million … nearly twice the $150 million in operating income generated by the company’s aluminum product lines.

Despite waning shipment levels and malaise for the industry, Alcoa believes the near and distant future revenue will be driven by demand for aircraft building materials. The company anticipates aircraft deliveries will grow 6% during the second half of 2016, then reach a double-digit pace again in 2017.

Part of that outlook may stem from the deal Alcoa recently struck with Brazilian aircraft maker Embraer, which calls for the delivery of $470 million worth of aluminum sheeting.

CEO Klaus Kleinfeld commented:

“As markets ever more rapidly evolve, we have made Alcoa increasingly agile; results continue to improve. In the face of a transforming aerospace market, we moved quickly to bring our costs down while capturing new opportunities. Contract wins continued as did our innovation leadership with the opening of a state-of-the-art metals powder plant geared toward rising demand for 3D-printed parts. Our automotive sheet revenue hit an all-time high. After substantially reshaping our Upstream segments they are now performing well even in a low pricing environment; we are building out our bauxite business and continue to win new supply contracts. Exceptional productivity and monetization of non-essential assets has put us in an excellent cash position. Our separation is on track for later this year.”

He’s not wrong. During the quarter the company culled $176 million in unnecessary expenses, and continued to migrate to a model that utilizes the power of 3D printing while streamlining the labor-heavy aluminum making processes.

Bottom Line for AA Stock

While Alcoa isn’t yet where it needs to be, it’s not where it was as of Q1. That in and of itself is a step forward, even if it’s only one of many that Alcoa needs to take.

At the heart of the future remains commodity prices.

While they were stronger at the end of Q2 then they were at the beginning of it, the ripple effect of the Brexit vote has jostled the value of the U.S. dollar, in turn jostling the value of aluminum and most other materials Alcoa supplies. So far, though, it looks as if commodity prices will rekindle their bigger uptrends as the Brexit pill continues to be a little less bitter than first presumed.

Nevertheless, there’s little doubt as to which of the two companies Alcoa is about to become will be the weaker sister barring an amazing, multiyear rebound not just in prices but also in consumption. Aluminum prices remains closer to multi-year lows than multiyear highs for a reason. Alcoa — the aluminum business — continues to face an uphill battle, while Arconic is positioned to thrive even in a modest economic environment.

Thing is, until the split, AA stock is a piece of both outfits. It only became marginally more compelling today.

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

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