Alcoa Inc (AA) Stock Earnings Will Set the Tone for Life After the Split

Alcoa Inc (NYSE:AA) is expected to post impressive engineered products and solutions (EPS) growth when it reports earnings next week. But don’t be surprised if the aluminum giant offers a soft outlook.

After all, there are a lot of moving parts here.

The upcoming earnings report will be the last one before Alcoa splits into two companies in November. To that end, AA stock just underwent a 1-for-3 stock split.

The point of the separation is to free its high-margin, highly engineered products manufacturing business from the drag of the lower-margin bauxite mining and aluminum manufacturing business. It looks like a wise move, and we’re likely to see more evidence as to why when Alcoa reports quarterly results.

The lower-margin side of the business remains under pressure from market imbalances. Aluminum prices have firmed up in 2016 but still remain well below post-recession peaks. Supply is headed in the right direction relative to demand, but we’re not there yet.

Sluggish global economic growth is depressing nonresidential building and construction markets in parts of the globe. In the U.S., demand from the auto industry could plateau at the same time AA expects a steep drop in the market for heavy trucks and trailers. Packaging customers are also cooling.

At the same time, Alcoa’s business in highly engineered products is building apace. Both Boeing Co. (NYSE:BA) and Airbus (OTCMKTS:EADSY) signed new supply agreements with Alcoa for aerospace parts and fastening systems.

AA Stock: Where Do We Go From Here?

Alcoa stock is having a decent year. With a year-to-date gain of over 5%, it’s within a fraction of a percentage point from the S&P 500. However, it has been solidly range-bound around $30 a share for more than six months. Uncertainty over aluminum prices and the impending split are just two forces hemming it in.

If AA stock does issue a disappointing forecast, as some analysts expect, we may not see any more upside for some time.

Morgan Stanley analysts think there’s a chance that Alcoa could come up short in guidance because of issues in the aerospace market. Evan L. Kurtz said in a note to clients:

“Between possibly lower wide body production, a still lackluster bizjet backdrop, and company specific dynamics, Aerospace estimates have more downside than upside risk.”

That said, the analyst maintains an “overweight” (buy, essentially) rating on Alcoa stock, in part because of the scope of EPS growth.

For the most recent quarter, earnings are expected to come in at 12 cents a share, up from 7 cents in the prior-year period. That’s despite a projected 4.3% drop in revenue to $5.33 billion.

Alcoa earnings have topped Wall Street’s forecasts for three consecutive quarters according to CNBC and could very well again next week. The imminent split offers another potential catalyst.

If the company can just get past the question of guidance, we can expect steady performance and perhaps even incremental gain in Alcoa stock through year-end.

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

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