Alcoa (AA) is set to release its fourth-quarter 2014 results after the close on Jan 12. In the last quarter, the New York-based aluminum giant logged a 47.62% positive earnings surprise riding on healthy results across its downstream and legacy primary aluminum businesses and higher aluminum pricing.
While many no longer see Alcoa as a major earnings season bellwether following its removal from the Dow Jones Industrial Average in 2013, there is no denying that its results still matter as it provides color on demand trends for aluminum across a bevy of industries, which is closely linked to levels of economic activity. Investors will look particularly for the company’s global aluminum demand forecast for 2015 and growth expectations for key end-use markets, especially aerospace and automotive.
Let’s see how things are shaping up for this announcement.
Factors to Watch For
We expect strong demand for aluminum across aerospace and automotive markets to continue to support Alcoa’s results in the December quarter. The company’s aggressive cost-cutting and productivity improvement actions should also lend support to its earnings in the quarter. Alcoa remains on track to move down the cost curve and is actively repositioning its portfolio, including closure of high-cost smelters.
Alcoa is witnessing healthy airline fundamentals and has reaffirmed its global growth expectations of 8%–9% for the aerospace sector for 2014 on the back of strong demand for both large commercial aircraft and regional jets.
The recent acquisition of U.K.-based leading jet engine components maker – Firth Rixson – represents a significant milestone in Alcoa’s portfolio transformation strategy. The $2.85 billion acquisition has allowed Alcoa to penetrate into a highly specialized segment of jet engine forgings and has further strengthened its robust aerospace portfolio.
Alcoa has also landed two multi-year contracts worth more than $2 billion with Boeing (BA) and Pratt & Whitney, further underscoring its efforts to strengthen its aerospace business. In addition, the company has opened the world’s biggest aluminum-lithium plant in Lafayette, IN, to make light alloy materials for the aerospace industry, representing the largest of its three aluminum-lithium expansions.
The automotive industry is also expected to offer significant opportunity. Healthy auto demand for sheet products is expected to boost profitability in the company’s global rolled products business in the December quarter.
Alcoa is also making a significant progress with its joint venture with Ma’aden in Saudi Arabia. The joint venture is developing the world’s lowest-cost integrated aluminum facility comprising a bauxite mine, an alumina refinery, an aluminum smelter and a rolling mill. Alcoa recently announced the production of first alumina from the refinery. The facility, when fully ramped up, is expected to offer significant cost advantage to Alcoa. We expect the company to offer an update on the joint venture in the fourth-quarter call.
However, Alcoa is still witnessing softness across building and construction and commercial transportation markets in Europe. Demand from the industrial gas turbine market is also expected remain weak in the fourth quarter.
While improved pricing aided Alcoa’s results in the third quarter, it is still faced with a volatile aluminum pricing environment given the oversupply of the metal in the market. The company is also expected to see higher energy costs in its primary metals business in the December quarter.
Earnings Whispers
Our proven model shows that Alcoa has the right combination of two key ingredients to beat earnings.
Positive Zacks ESP: The Earnings ESP (Expected Surprise Prediction) for Alcoa is +11.54% – the difference between the Most Accurate estimate of 29 cents and the Zacks Consensus Estimate of 26 cents. This indicates a likely positive earnings surprise.
Zacks Rank #2 (Buy): Alcoa’s Zacks Rank #2 increases the predictive power of its ESP.
Note that stocks with Zacks Rank of #1, 2 and 3 have a significantly higher chance of beating earnings. The Sell rated stocks (#4 and 5) should never be considered going into an earnings announcement.
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:
Cliffs Natural Resources Inc. (CLF) has earnings ESP of +31.58% and carries a Zacks Rank #3 (Hold).
Randgold Resources Limited (GOLD) has earnings ESP of +6.67% and carries a Zacks Rank #3.
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