Alcoa AA is set to release its second-quarter 2015 results after the close on Jul 8. In the last quarter, the New York-based aluminum giant logged a 7.69% positive earnings surprise on strength across aerospace and automotive markets and its portfolio optimization initiatives. Alcoa has racked up positive surprises in the trailing four quarters, with an average beat of 30.17%.
Notwithstanding its removal from the Dow Jones Industrial Average in 2013, Alcoa’s results still matter as it provides a spotlight on demand trends for aluminum across a vast spectrum of industries, which is closely linked to levels of economic activity. The results would also mark the unofficial start to the second-quarter earnings season.
Alcoa, in April, said that it expects global aluminum demand to grow 6.5% in 2015. Investors will look particularly for the company’s commentary on aluminum demand and pricing trends and expectations for key end-use markets.
Let’s see how things are shaping up for this announcement.
Factors at Play
Alcoa is seeing strong demand across aerospace and automotive markets. It expects the aerospace market to grow 9%-10% in 2015 on the back of strong demand for large commercial aircraft, regional jets and jet engines. Healthy demand from key end-markets coupled with the company’s aggressive cost-cutting and productivity improvement actions should lend support to its earnings in the June quarter.
Alcoa continues to look for expansion opportunities beyond its legacy primary aluminum business and diversify into other materials such as those (nickel and titanium-based) used to make aircraft parts. It is actively pursuing its aerospace expansion strategy.
The purchase of U.K.-based leading jet engine components maker – Firth Rixson – has allowed Alcoa to penetrate into a highly specialized segment of jet engine forgings and has further strengthened its robust aerospace portfolio. Moreover, the buyout of Germany-based Tital – a leading provider of titanium and aluminum structural castings – boosts Alcoa’s position to leverage strong growth in the commercial aerospace sector and capture rising demand for advanced jet engine components made of titanium.
Moreover, the proposed acquisition of titanium and specialty metal products supplier – RTI International Metals, Inc. RTI – is expected to expand Alcoa’s titanium offerings and add advanced technologies and materials to its portfolio.
Alcoa is also ramping up production to address healthy automotive demand. While pricing remains a concern, strong demand for auto sheet products is expected to favorably impact the company’s global rolled products business in the second quarter.
Moreover, Alcoa remains on track to move down the cost curve and is actively repositioning its portfolio, including closure of high-cost smelters. The company is evaluating 500,000 metric tons of smelting capacity and 2.8 million metric tons of refining capacity for possible curtailment, closure or sale. Alcoa recently said that it will permanently shut down its Pocos de Caldas primary aluminum smelter in Brazil which would reduce its global smelting capacity by 96,000 metric tons.
However, softness across non-residential building and construction, and commercial transportation markets is expected to persist in Europe in the second quarter. The North American packaging market is also expected to remain weak.
Moreover, Alcoa is still faced with a volatile aluminum pricing environment given the oversupply of the metal in the market. Lower realized aluminum prices hurt earnings in the primary metals business in the first quarter and is expected to remain a headwind.
Alcoa is also expected to see lower production in its alumina business in the second quarter due to the curtailment of refining capacity at its Suriname refinery. Moreover, production and shipments are expected to decline in the primary metals business in the quarter due to reduction of capacity at the Sao Luis facility in Brazil. Alcoa is also expected to take restructuring-related charges of $100-$110 million (post-tax) or 8-9 cents per share in the June quarter in connection with the Pocos de Caldas smelter closure.
Earnings Whispers
Our proven model does not conclusively show that Alcoa is likely to beat the Zacks Consensus Estimate in the second quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here, as you will see below.
Zacks ESP: ESP for Alcoa is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 23 cents.
Zacks Rank #3 (Hold): Alcoa’s Zacks Rank #3 when combined with an ESP of 0.00% makes surprise prediction difficult. We caution against stocks with Zacks Ranks #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Stocks That Warrant a Look
Here are some other mining companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:
HudBay Minerals, Inc. HBM has earnings ESP of +115.39% and carries a Zacks Rank #3.
Cliffs Natural Resources Inc. CLF has earnings ESP of +45.46% and has a Zacks Rank #3.
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