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3 Things to Watch When Alcoa Reports

Earnings season kicks off this week with Alcoa (NYSE: AA  ) reporting after markets close on Tuesday. The Dow component and aluminum giant has struggled to regain its footing after stumbling through the global financial crisis. Is the company on its way back? Here are three things you should watch for once the company reports.

Can it beat the numbers?
Analysts expect Alcoa to earn $0.07 on the quarter and just $0.24 for the full year. Over the past month more than a third of the analysts covering the company have reduced their expectations for the quarter. An earnings beat combined with an upbeat outlook would be welcome news both to Alcoa investors and the market. Another important number to watch is revenue. Analysts are looking for $5.6 billion which is a year-over-year decline of 6.5% from $5.989 billion. If revenue comes in lower than expected, then it'll likely drag the stock down as well.

What's the aluminum outlook?
The global outlook for aluminum isn't pretty. In the past year Rio Tinto (NYSE: RIO  ) has written down $9 billion worth of aluminum assets while BHP Billiton (NYSE: BHP  ) canceled plans to build an aluminum smelter in Africa. Alcoa and its aluminum producing peers have announced more than 1.3 million metric tons of production cutbacks. The industry has been cutting costs and taking down capacity in an effort to boost margins, but it can only do so much on the supply side of the equation. Investors need to watch for any signs that demand is improving. A big potential driver of demand is China's $150 billion infrastructure stimulus plan. If that plan can produce the desired economic results it would bode well for the price of aluminum and Alcoa's future.

Is the debt a problem?
In late December, Moody's placed Alcoa's debt under review for a possible downgrade to junk. Moody's noted that "the review reflects the challenging headwinds facing Alcoa given the decline in aluminum prices that has occurred, on a sequential quarterly basis ... and the adverse impact this has had on Alcoa's earnings performance and earnings based debt protection metrics in particular." The ratings rationale further went on to state that Moody's does "not see a material, sustainable improvement in aluminum prices over the next several quarters and expect Alcoa's earnings performance and debt protection metrics to remain challenged." Alcoa will need to address the potential ratings downgrade head-on in its upcoming earnings report. The company will need to be up front with any additional cost-cutting measures or divestitures it is planning to enact in an effort to keep its rating from being cut to junk.

Bottom line
Being a pure-play aluminum company works well when the commodity is priced at a premium. With a muted outlook for aluminum over the near term, Alcoa's ability to generate market beating returns will also be muted. The key for the company going forward will be its ability to keep costs down so that it its earnings can grow even as aluminum prices stagnate.

Materials industries are traditionally known for their high barriers to entry, and the aluminum industry is no exception. Representing 14.7% of 2011 global production in this highly consolidated industry, Alcoa is in prime position to take advantage of growth that some expect will lead to total industry revenue approaching $160 billion by 2017. Based on this prospective growth and several other company-specific factors, Alcoa is certainly worth a closer look. For a Foolish investment perspective on this global giant simply click here to get started.

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Related Tickers

9/30/2016 4:01 PM
AA $10.14 Up +0.18 +1.81%
Alcoa CAPS Rating: ***
BHP $34.65 Up +0.25 +0.73%
BHP Billiton CAPS Rating: ***
RIO $33.40 Down -0.30 -0.89%
Rio Tinto CAPS Rating: ***