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Alcoa Gives A Good Start To Earnings
American aluminum giant Alcoa (NYSE:AA) has long held the distinction of being the first major U.S.
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The Quarter that Was
Alcoa reported that sales jumped 22% from last year and 6% from the prior quarter. Of that 6% growth, two-thirds came from increased shipments. Gross margins improved significantly from the year-ago period, and the company continued a strong resurgence to profitability from both the prior quarter and the year-ago period.
All in all, the company beat revenue estimates by a healthy margin ($5.2 billion reported, versus an estimate of $5.05 billion) and adjusted earnings per share were two cents better than the average estimate (13 cents versus 11 cents). One note of caution is in order, though. Analyst expectations for Alcoa's performance had been steadily sliding for weeks, so the "outperformance" has to be seen in that context - things ended up being less worse than analysts had begun to fear.
Looking Ahead
Despite a fair bit of pessimism swirling around, Alcoa management seemed rather upbeat about near-term prospects. The company representatives said that they saw improving demand in all of their markets, and particular strength in packaging, transport, and building/construction. Also noteworthy were the comments on the tight scrap market, as that is a widely-followed economic indicator. (For more, see Economic Indicators For The Do-It-Yourself Investor.)
Alcoa's enthusiasm certainly gels with some other signs of recovery. Boeing (NYSE:BA) (a major consumer of aluminum) has been pretty sanguine about the aerospace market, and automakers like Hyundai and BMW have been showing strong production, even though Ford (NYSE:F) and GM have been weaker.
Interestingly, though, aluminum prices have been relatively weak of late (down more than 15% in the past couple of months), the LME's reported inventories are somewhat high, and even Alcoa is looking for a global surplus of over 1 million metric tons. Couple that with capacity utilization of around 75% at Alcoa and it seems like a classic "yes, but" economic recovery - as in, yes the global economy does seem to be on the road to recovery, but there are plenty of threats lurking in the weeds.
Where do we Go from Here?
I personally prefer to own stocks where the anticipated time between buying and selling can be measured in years, and that is clearly not the case with a stock like Alcoa unless you can stomach the extreme ups and downs that go with the cycle. That said, I am intrigued by the pullback in economically-sensitive stocks. Companies in a range of sensitive sectors like construction, auto supply, and industrial infrastructure, including Louisiana-Pacific (NYSE:LPX), American Axle (NYSE:AXL), and Emerson Electric (NYSE:EMR), have all pulled back significantly.
That tells me there is still ample pessimism and doubt about the recovery. Some of that pessimism is certainly rational, asEurope is staggering along, Japan China
The Bottom Line
Clearly these are not trades for the buy-and-hold crowd, but if you still believe in the inevitably of global economic recovery, now is a good time to do your diligence on basic metals and Alcoa is a good place to start.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 20 Tools For Building Up Your Portfolio
The Quarter that Was
Alcoa reported that sales jumped 22% from last year and 6% from the prior quarter. Of that 6% growth, two-thirds came from increased shipments. Gross margins improved significantly from the year-ago period, and the company continued a strong resurgence to profitability from both the prior quarter and the year-ago period.
All in all, the company beat revenue estimates by a healthy margin ($5.2 billion reported, versus an estimate of $5.05 billion) and adjusted earnings per share were two cents better than the average estimate (13 cents versus 11 cents). One note of caution is in order, though. Analyst expectations for Alcoa's performance had been steadily sliding for weeks, so the "outperformance" has to be seen in that context - things ended up being less worse than analysts had begun to fear.
Looking Ahead
Despite a fair bit of pessimism swirling around, Alcoa management seemed rather upbeat about near-term prospects. The company representatives said that they saw improving demand in all of their markets, and particular strength in packaging, transport, and building/construction. Also noteworthy were the comments on the tight scrap market, as that is a widely-followed economic indicator. (For more, see Economic Indicators For The Do-It-Yourself Investor.)
Interestingly, though, aluminum prices have been relatively weak of late (down more than 15% in the past couple of months), the LME's reported inventories are somewhat high, and even Alcoa is looking for a global surplus of over 1 million metric tons. Couple that with capacity utilization of around 75% at Alcoa and it seems like a classic "yes, but" economic recovery - as in, yes the global economy does seem to be on the road to recovery, but there are plenty of threats lurking in the weeds.
Where do we Go from Here?
I personally prefer to own stocks where the anticipated time between buying and selling can be measured in years, and that is clearly not the case with a stock like Alcoa unless you can stomach the extreme ups and downs that go with the cycle. That said, I am intrigued by the pullback in economically-sensitive stocks. Companies in a range of sensitive sectors like construction, auto supply, and industrial infrastructure, including Louisiana-Pacific (NYSE:LPX), American Axle (NYSE:AXL), and Emerson Electric (NYSE:EMR), have all pulled back significantly.
That tells me there is still ample pessimism and doubt about the recovery. Some of that pessimism is certainly rational, as
The Bottom Line
Clearly these are not trades for the buy-and-hold crowd, but if you still believe in the inevitably of global economic recovery, now is a good time to do your diligence on basic metals and Alcoa is a good place to start.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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