Alcoa (AA) is scheduled to report 1Q16 results April 11 after the market closes with a conference call to follow at 5 pm EDT the same day. Capital IQ consensus calls for EPS of $0.03 on revenues of $5.15 bln, compared to actual adj EPS of $0.28/share on revenue of $5.82 bln recorded in 1Q15.
Alcoa's (AA) operations consist of 5 worldwide reportable segments:
- Alumina (19.4% of FY15 sales)
- Primary metals (29.3% of FY15 sales)
- Global rolled products (24.0% of FY15 sales)
- Engineered products & solutions (20.2% of FY15 sales)
- Transportation & construction solutions (7.1% of FY15 sales)
The co emphasizes the unfavorable environment it is operating in. Strong productivity gains seen each quarter have been more than offset by lower alumina and aluminum prices. For example, in 2015 the Midwest transaction price for primary aluminum fell 28% to $657/metric ton, and the Alumina Price Index dropped 43% to $154/metric ton.
Expectations are low given the sentiment around aluminum and related base metals prices. The co has been working to cut costs and has been closing its smelter operations over the past couple of months. It is now down to one smelter operating in the U.S.
On Nov 23 2015, Elliott Management disclosed a 6.5% stake in Alcoa (AA). The driving factor behind the move was the stock's valuation, which Elliott viewed as 'dramatically undervalued'. Sentiment remains low, but it will be interesting to see if the co is able to show progress in its split and whether or not that will be enough to entice investors off the sidelines.
On Sept 28 2015, The co announced that it would be splitting the company into two. The announcement led to a 20%+ rally in the stock as investors welcomed the move. But Alcoa has since given up those gains as the overall market conditions have led to a steady bid in shares. The plan for the split is for the co to be divided up into two segments.
Company Split:
One company will comprise the Alumina and Primary Metals segments and the other company will comprise the Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions segments. Alcoa is targeting to complete the separation in the second half of 2016.
The smelting and refining biz produces assets that sell into enterprises that run electric power grids. This has been the primary drag on operations as aluminum prices continue to fall. AA has been trying to offset the drop in revenue by an aggressive cost cutting plan. The legacy unit accounts for approx 50% of revenues. The other unit is the co's downstream unit that supplies components to the auto and aerospace industries. The value added side of the business has been where the growth has taken place and has helped offset some of the downside to the upstream business. This is viewed as the better of the two units as it operates in favorable sectors and is generating the majority of profits.
Co has established a governance structure led by a steering committee, a separation program office, and functional teams to separate Alcoa into two standalone companies. The separation program office is ensuring that all deliverables and deadlines will be met to make the separation effective in the second half of 2016. Alcoa is targeting a Form 10 filing with the U.S. Securities and Exchange Commission by mid-2016. We will be looking for additional details and progress on the separation on the earnings call.
A technical perspective:
Technically, the stock has been consolidating in $1 range the last few weeks, struggling with its multi-month resistance at the $10-area. During that time, it has managed to successfully clear its 200-day simple moving average for the first time in over a year, so there's the potential that its bigger picture downtrend could be nearing an end. As for how it responds to earnings, Buyers will want to see a sustainable breakout over the $10-mark going forward. Sellers will want to take out $9-support and slam the stock back below $8.
Outlook:
In 2016, Alcoa expects a global aluminum deficit of 1.2 mln metric tons and a global alumina deficit of 2.8 mln metric tons due to global curtailments. The co also projects record global aluminum demand in 2016 of 60.5 mln metric tons, up 6% over 2015. Global aluminum demand is expected to double between 2010 and 2020; so far this decade, global demand growth is tracking ahead of this projection, according to the co.
4Q15 Recap:
- Reported Q4 earnings of $0.04/share, excluding non-recurring items, $0.03 better than the Capital IQ Consensus of $0.01; rev fell 17.8% year/year to $5.25 bln vs the $5.28 bln Capital IQ Consensus
- Organic growth in aerospace and acquisitions increased rev 7%, which was more than offset by a 25% rev decline from lower alumina and aluminum prices, the impact of divested, curtailed or closed facilities, and unfavorable currency
- The Value-Add biz reported strong performance, while the upstream remained profitable despite lower alumina and aluminum prices
- Every segment delivered productivity gains
-Peers of Alcoa (AA): CENX, KALU, BLL, ACH, CSTM. CENX usually moves the most in response to movement in shares of Alcoa (AA)
-Shares of Alcoa (AA) are currently up ~4.5% at $9.80/share
Alcoa 1Q16 earnings preview