Alcoa (AA) opens the 1Q13 earnings report season

earnings season again

It’s quarterly earnings season again, the time when every growth stock investor gets a report card on whether he’s picked fast growers or not.

…as usual, AA is first out of the blocks, reporting after yesterday’s New York close.

…as usual, talking heads reach into their bags of clichés and dub AA as a bellwether, or setter of the overall market trend.

…as usual,  the media will interview metals analysts who will “confirm’ the bellwether status of AA.  But, hey, they make their living by having people pay them for their expert knowledge of aluminum.  What else are they supposed to say?   …that it’s a niche industry you can easily live without?

…as usual, the reality for AA is far different, as even a casual glance at a stock chart of AA shares over the past decade would reveal.

the AA report

Alcoa earned $.11 a share in the March quarter, up from $.06 in the year ago period.

–Severe production cutbacks by aluminum producers have brought the supply of aluminum into better balance with demand and improved pricing.

–China’s use of aluminum will grow by around 10% this year; Europe will be down mildly, with beverage cans showing the only plus sign; the US will be up a tiny bit.

–Aerospace will grow by 10% or so globally, non-residential construction by half that.  Everything else–motor vehicles, beverage cans, turbines and housing– is in the +2% – +3% range.

Analysts think AA will post full-year earnings of around $.50 a share this year and $.85 a share next.

All in all, a good report by a very well-managed company in a tough industry.  If the 2014 number is even close to correct, the stock may be mildly undervalued, in my view.

The report also shows that things are ok, but not great, in the industrial sector.  But, to my mind, the report illustrates, too, why metals, and aluminum in particular, are not the place to be overweight in a portfolio right now.

the bellwether thing?

Let’s hope not.

Just look at a chart of AA.  At the top of the market–and of the housing construction boom–in 2007, AA was a $48 stock.  Today, with the S&P reaching new all-time highs, AA is $8 and change.  In fact, except for a brief period in 2007-08, AA has been a serial underperformer for over a decade.


AA has a highly skilled management, but it’s in a highly business cycle-sensitive industry.  Like almost any mining-based activity, it’s also subject to extended periods of depressed prices as gigantic new mining/fabrication projects–years and years in the planning–get opened, usually just as the business cycle is turning down.

A generation ago, conventional wisdom was that world GDP grew in lockstep with the availability of base metals supplies.  In those days, AA was indeed a bellwether.  But the rise of the knowledge worker, to say nothing of the internet, shows how wrong that thinking has proved to be.


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