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3 Key Takeaways From Alcoa’s 1QFY14 Earnings Release

3 Key Takeaways From Alcoa’s 1QFY14 Earnings Release
By: Micheal Kaufman
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Alcoa Inc. (AA) reported earnings for the first quarter of its fiscal 2014 (1QFY14; ended March 31, 2014) after US markets closed yesterday. The stock price of the world’s largest primary and fabricated aluminum maker is currently 3.2% higher in pre-market trading, and is currently hovering around its 52-week high of $13.18.

This week marks the beginning of the earnings season, and for a long time now Alcoa has been the first S&P 500 company to report its quarterly earnings. Since aluminum is used by key industries such as the automobile, aerospace, and construction industry, these earnings results can serve as an early preview for investors about what to expect from these industries in the coming earnings season.

We take a look at three key takeaways from the earnings announcement issued by the Pittsburgh, Pennsylvania-based company.

1. Revenue And Earnings Estimates

The company reported revenues of $5.454 billion for the period, a decline of 6.5% from the year-earlier period, primarily due to capacity reduction in Primary Metals and a decline in realized aluminum prices, which fell 8% year-over-year. Alcoa also cited extreme weather conditions in North America as a reason for the decline in revenues. The company missed analysts’ estimates of $5.551 billion by 1.74%, which marks the first time in the past four quarters that the company missed the Street’s estimates.

Alcoa reported adjusted earnings per share of $0.09, down from $0.11 in 1QFY13, beating analysts’ estimates of $0.052 by an impressive 73.1%. The company has missed earnings estimates only once in the last eight quarters.

2. Alcoa is Restructuring

The 125-year-old aluminum maker is trying to shift focus from its primary metal segment – which is involved in transforming alumina into raw aluminum in smelters – to its so-called downstream units.  The primary metal segment accounted for 32% of the total revenues for the quarter, but reported a loss of $15 million, making it the company’s only loss-making segment.

As evidence of this change in emphasis, Alcoa recently closed down two rolling mills and an aluminum smelter in Australia, and a smelter plant in the US, as part of its program to slash costs amid challenging market conditions. The company also announced last month that it plans to reduce smelting capacity in Brazil by 147,000 tons.

The company is instead concentrating on its aforementioned downstream units, which manufacture finished and semi-finished products for the automotive and aerospace industries. The Engineered Products and Solutions as well as the Global Rolled Products segments fall under the downstream units. These segments collectively contributed 47.4% of total revenues during the quarter, and generated profits of $248 million.

3. Alcoa’s Future Outlook

Alcoa also provided its outlook on its end-market for aluminum. The company expects the global aerospace market to grow 8-9% this year, whereas in January it had predicted growth of 7-8%. Currently, the aerospace industry has a backlog of over eight years, and the cause behind the increased growth is rising demand from the Asia and Gulf regions.

The company also expects a 2-5% growth in the US automotive industry, and 0-4% growth in Europe. Alcoa also forecasts Chinese automotive demand to grow 6-10% this year. Ford Motor Company (F) had announced at the start of the year that it plans to use an aluminum exterior for its new F-150 truck, and General Motors Company (GM) has signed a direct deal with Alcoa. The companies have thus become catalysts for increased aluminum production.

Alcoa stock is currently trading at one-year forward price-to-earnings (P/E) multiple of 28x, which translates into a premium of 73.8% to its average three-year P/E multiple. Since the start of the year, the stock price of Alcoa has increased by over 19%, while the S&P 500 ETF (SPY) increased just 0.7%.

Out of the 20 analysts covering the stock, six have given Alcoa a Buy rating, 10 have rated it a Hold, and four rate it as a Sell.

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