While Donald Trump’s tariffs are still in the early phases, we are already seeing the winners and losers. Just look at Alcoa (NYSE:AA). This week, the shares got crushed because of a dicey earnings report — largely due to the ill-effects of tariffs. On the news, AA stock fell by 13%. In fact, for the year so far, the return is -23%.
Of course, AA stock is not the only loser. Much of the rest of the aluminum sector has come under pressure, as seen with companies like Century Aluminum (NASDAQ:CENX), Arconic Inc. (NASDAQ:ARNC) and Constellium N.V. (NYSE:CSTM).
Now, on its face, the second quarter report for Alcoa had some bright spots. Adjusted earnings came to $286 million or $1.52 per share, up from $116 million, or 62 cents a share for the same period a year ago. The Street, on the other hand, was looking for $1.32 per share.
Alcoa also beat on the top-line. Revenues jumped by 28.5% to $3.6 billion, compared to the consensus estimate of $3.5 billion.
But, unfortunately, the outlook was kind of awful — which is why AA got slammed. The company now expects adjusted EBITDA to fall from $3.5 billion-$3.7 billion to $3 billion-$3.2 billion.
AA Stock and Tariffs
The US tariffs on aluminum — which went into effect in June — were actually supposed to be a nice driver for AA stock. And, in fact, during the quarter, there was a lift in domestic sales.
But it was not enough. The problem is that AA is a global company, with production facilities in various countries. For example, in order to meet demand in the US market, the company produces aluminum in Canada and sends it back. Yet this means that the sales are subject to the tariff.
On the conference call, Alcoa CEO Roy Harvey noted: “In short, tariffs will not solve the challenges faced in the aluminum industry.”
One problem is that there is not enough capacity in the US. Keep in mind that the youngest smelter is 40 years old!
According to Roy: “Most importantly, even if all U.S. curtailed capacity was back online and producing metal, the U.S. would still need to import the vast majority of its required primary aluminum with approximately 60% from Canada, which is key to the North American supply chain. Canada is an important source of metal for U.S. aluminum consumers. We operate three smelters in Canada and were disappointed that it was not excluded from tariffs.”
Next, countries like China continue to subsidize their own capacity. The result is that it is extremely tough for Alcoa to compete. And tariffs really have no effect on this.
In light of all this, Alcoa expects to see higher costs from tariffs, ranging from $12 to $14 million per month.
Bottom Line on AA Stock
Tariffs are not the only nagging issue for AA stock. Consider that the company is also feeling the pressures from higher energy prices, as well as competitive forces on other parts of the business.
Granted, the valuation on AA stock is fairly cheap. Note that the forward price-to-earnings ratio is only 10.
Yet, the low valuation could persist for some time. After all, there is no clarity on how long the tariffs will remain in effect. And, in the meantime, AA still must fend off the tough challenges from foreign competitors. In other words, it’s probably best to avoid the stock for now.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.