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.


Alcoa (AA) and the 2Q12 earnings season

the results

AA reported 2Q12 earnings results last night.  The company earned profits of $61 million, or $.06 per share, for the quarter, on revenue of $6 billion.  The result exceeded the consensus of 18 professional analysts covering AA by $.01 per share.

is AA a bellwether?

AA is the first major US company whose accounts run on a calendar year to report results each quarter.  Its end products, alumina and aluminum, are key industrial raw materials.  As a result, Wall Street looks will special interest to what AA will say.

In my view, AA’s results vs. the analyst consensus aren’t that important, unless the reported numbers are hugely different from the estimates.  AA is a highly complex global company with very sophisticated management.  It has many possible suppliers of its inputs, all of which can have complicated–and different–contractual arrangements.  Some have equity ownership interests by AA, which vary by supplier.  I think no outsider has much of a chance, even after years of trying, of creating a financial model of AA’s operations that would predict earnings per share with a high degree of accuracy.

I think there are implications for the rest of Wall Street in the earnings figures themselves.  It says something if AA makes a lot of money in a given quarter, or a little, or makes a loss.

what is important from AA

If you’re a shareholder, you’d focus on the continuing ability of the company to generate cash flow, and to increase the efficiency of its operations, in almost any economic environment.  That’s been a constant for years and years.

If, like me, you’re not. you’ll pay more attention to what AA says about the world economy.

What jumps out to me from yesterday’s conference call is:

–the global aerospace business continues to be very strong

–automotive is good, especially in the US, where AA is revising its expectations up

–there are early signs of a pickup in the US cans/packaging business

–the main macroeconomic area–no surprise here–is Europe.

My overall takeaway: most of the world is in roughly the same shape that the consensus believes, but that the US may be a little bit better.


Alcoa’s 3Q11–bellwether for the S&P 500? No.

AA as bellwether

AA is the first major company in the S&P 500 to report earnings for the calendar year quarterly cycle.  Market commentators often make a big deal about AA’s results on the idea that they set the tone for the earnings season.  I don’t think that’s right, either in general or for this quarter.

My reason?

I should probably confess in advance that aluminum isn’t my favorite metal and that I’ve only occasionally owned AA or any of its affiliated companies in my portfolios.  But I’ve spent years analyzing metals and mining stocks.  In fact, my first portfolio job was to manage Australian stocks at a time when half that market was natural resources.

Anyway, I view AA is an exceptionally well-managed industrial company.  But, contrary to the images that “aluminum” and “mining” conjure up of machines taking special dirt out of a big hole in the ground, AA is an unusually complex enterprise, whose quarterly earnings are very hard to analyze.  Most quarterly earnings surprises, positive or negative, are mostly due to how hard it is for an outsider to see the inner workings of AA.  As a result, earnings surprises, including this one, have very little meaning, in my view.

3Q11 results

As it turns out, AA earned $.15 per share for the September period.  That was 2.5x the $.06 per share it posted for the comparable quarter in 2010.  But it was also down 46% from the $.28 a share it earned in 2Q11.  Results also fell short of the Wall Street analyst consensus of $.22.

As I’m writing this, AA shares are down about 4% in pre-market trading, while S&P futures are suggesting an opening gain for the index of about .9%.

More below about why AA results are so hard to predict.  But first,

how AA sees the world today

In its conference call, AA drew a sharp contrast between the current situation and that during the dark days of 2008-09.  The company is better prepared now for a possible downturn than it was then.  However, right now it doesn’t see a downturn as likely.  In AA’s view, the fall in London Metal Exchange prices during the third quarter is purely speculative, with short-sellers using aluminum solely as a proxy for world economic growth (which, when you get down to it, the metal is).  But AA thinks the speculatros are making a mistake.  Underlying demand remains strong, especially in emerging economies.

True, Europe is a worry.  One reason for AA’s quarter on quarter weakness is that European customers pulled back their orders.  At this point, it’s not that final demand has collapsed.  It’s that companies have been shrinking their inventories to unusually low levels in order to raise cash in anticipation that EU political leaders may yet bungle their way into a banking crisis.  As/when that rear abates, the European order flow should quickly reverse.

why so hard to analyze?

AA is vertically integrated.  It mines ore, refines it into basic products, and manufactures advanced aluminum industrial components. It buys and sells stuff at every point in the production chain.

Its products are in everything from airplanes to toothpaste and soda cans, and in products that sell all around the world.

It has many sources of raw materials, some owned, some not, to choose from.  Its selections are constrained by contractual relationships that can rival for complexity anything in the film or oil industries. While prices of inputs and outputs may be tied to industry benchmarks, there can be leads or lags of months before changes kick in.  Contracts may require the buyer to pay for specified quantities whether he takes delivery or not (it’s a little more complicated than this, but nothing to worry about).  All of this is difficult for an analyst to find out about and model.

Even more discouraging, the stock tends to move on changes in aluminum prices, which can occur far in advance of reported earnings.

my thoughts

To my mind, AA is giving a relatively upbeat view of the world economy–well, maybe ex the EU. And even there, the situation doesn’t sound too bad.

I don’t think the company’s earnings “miss” has any predictive value for firms outside the base metals industries.  Given the stock’s severe underperformance of the S&P over the past three months, I’m a bit surprised that it’s down at all after the earnings report.  It will be interesting to see how it fares in regular trading today.