Alcoa AA is set to release its fourth-quarter 2015 results after the close on Jan 11. In the last quarter, the New York-based aluminum giant logged a 50% negative earnings surprise as lower aluminum prices continued to hammer its legacy aluminum smelting business.
Revenues also slipped by double-digits year over year, and missed expectations. The company’s outlook also indicated a slowdown across a number of markets in China.
Alcoa’s results are closely watched by investors as they shed light on demand trends for aluminum (a major industrial metal) across a wide gamut of industries, which is closely linked to levels of economic activity. Investors will look particularly for management’s commentary on aluminum demand and pricing trends and expectations for key end-use markets for 2016.
Let’s see how things are shaping up for this announcement.
Factors to Watch For
Alcoa is reeling under the effects of commodity rout. It continues to grapple with weak aluminum pricing. Lower realized aluminum prices hurt earnings in its primary metals business in third-quarter 2015 and is expected to remain a headwind in the December quarter.
Aluminum prices remain under pressure given the oversupply of the metal in the market, exacerbated by surging exports of the metal by China (the world’s biggest producer) amid waning domestic demand. London Metal Exchange (LME) aluminum prices have languished to a six-year low on oversupply concerns. Weak aluminum prices have taken their toll on Alcoa's shares which tumbled roughly 37% in 2015.
Alcoa is taking major steps, including closure of high-cost smelters, to cope with the low aluminum pricing environment. The company is trimming uncompetitive aluminum smelting and alumina refining capacity to move down the cost curve and maintain competitiveness in a challenging operating backdrop.
Alcoa, in Nov 2015, announced that it will idle the Intalco & Wenatchee primary aluminum smelters in Washington State and also permanently close the New York Massena East aluminum smelter.
Moreover, the company said yesterday that it will shutter its Warrick Operations smelter in Indiana by the end of first-quarter 2016 and cut alumina production by 1 million metric tons by the end of the second quarter, including curtailment of refining capacity at its Point Comfort operations in Texas. Alcoa expects to take charges of around $120 million (or 9 cents per share) related to these actions in fourth-quarter 2015.
Alcoa also faces headwinds associated with weakness across non-residential building and construction, and commercial transportation markets in Europe. The North American packaging market also remains sluggish.
Nevertheless, Alcoa is seeing strong momentum across aerospace and automotive markets. Healthy demand from these key end-markets coupled with the company’s aggressive cost-cutting and productivity improvement actions is expected to lend support to its earnings in the December 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. The company is actively pursuing its aerospace expansion strategy.
Alcoa recently landed two multi-year supply contracts with Boeing BA worth more than $2.5 billion. Alcoa will supply multi-material fastening systems and ready-to-install titanium seat track assemblies to the aircraft maker. Alcoa also cut a $1 billion deal with Airbus in Oct 2015 to supply the latter titanium, steel and nickel-based superalloy aerospace fastening systems. The deal marked Alcoa’s biggest fastener contract ever with Airbus.
Moreover, Alcoa is ramping up production to address healthy automotive demand. While pricing remains a concern, strong demand for auto sheet products is expected to continue to favorably impact the company’s global rolled products business in the December quarter.
Alcoa, in Sep 2015, said that it is separating its smelting and refining business from those that cater to rapidly growing aerospace and automotive markets in a bid to shore up growth amid the prevailing difficult operating environment.
The separation will result in the creation of two standalone, publicly traded entities – The Upstream Company and The Value-Add Company. The transaction, which is subject to specific conditions including final approval by Alcoa’s board, is expected to close in second-half 2016. The separation will mark the completion of Alcoa’s multi-year transformation. We expect the company to provide more color on the planned split in its fourth-quarter call.
Earnings Whispers
Our proven model does not conclusively show that Alcoa is likely to beat the Zacks Consensus Estimate in the fourth quarter. That is because a stock needs to have both a positive Earnings ESP (Expected Surprise Prediction) 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 4 cents.
Zacks Rank #4 (Sell): Alcoa’s Zacks Rank #4 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:
Thompson Creek Metals Company Inc. TC has earnings ESP of +27.27% and sports a Zacks Rank #3 (Hold).
Royal Gold, Inc. RGLD has earnings ESP of +13.04% and carries a Zacks Rank #3.
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