What to Watch for When Alcoa Reports Earnings

Aluminum giant Alcoa (NYSE: AA  ) is set to report earnings on Thursday, January 9. Alcoa is often viewed as an economic bellwether, since it serves a multitude of major markets including the aerospace, energy, automotive, and transportation industries. And, since Alcoa is one of the first of the basic materials giants to report earnings, its reports are especially important to the kickoff of corporate earnings season.

As the economic recovery proceeds, Alcoa's businesses are also strengthening. At the same time, Alcoa has been barely profitable over the past couple of quarters, meaning its execution abilities are critical to once again posting a profit. Here's what investors should pay particular attention to when Alcoa reports earnings on Thursday.

Some progress made, more needed
Alcoa generated some momentum in its key business segments over the past couple of quarters, which will need to continue if the company is to once again turn a profit. Alcoa generated $0.11 per share in adjusted diluted earnings in the third quarter.

Strong results across the aluminum industry bode well for Alcoa, as the industry is clearly benefiting from the steady global economic recovery. For example, Rio Tinto (NYSE: RIO  ) also saw momentum in its aluminum business through the first three quarters of the fiscal year. Its aluminum production increased 5% through the first nine months of the year. Even other domestic aluminum producers are quickly getting back to health. Kaiser Aluminum (NASDAQ: KALU  ) has reported strong profitability throughout the year. Its diluted earnings are up 1% through the first nine months to $4.02 per share.

Kaiser Aluminum management maintains a very positive outlook for its business, and expects improved performance for itself in the fourth quarter, due to strength in the aerospace and automotive markets. Clearly, this should benefit Alcoa significantly, as it's consistently been a leader in these industries. As a result, there's a fair amount of pressure on Alcoa to execute in the final quarter of the fiscal year.

Can Alcoa generate free cash flow in 2013?
Alcoa's overarching 2013 target is to be free-cash flow positive. Despite Alcoa's profitability in the third quarter, it was still free-cash flow negative. Alcoa's initiatives to produce positive free cash flow for full-year 2013 include productivity gains, managing its growth capital, producing strong results from its Saudi joint venture, and maintaining a healthy balance sheet.

Alcoa has succeeded on a few of these fronts through the first nine months of the year, which sets the stage for its fourth-quarter results. For instance, Alcoa management's goal is for $750 million in productivity gains, and through the first nine months it's already generated $825 million in productivity.

However, of particular concern is Alcoa's Saudi joint venture, where the company wanted to realize $350 million in gains. Unfortunately, it's less than halfway to that goal through the first nine months of the year, meaning it still has a ways to go. Another area to watch is Alcoa's balance sheet. The company hopes to keep a strict debt-to-capital ratio of between 30%-35%. At the end of its most recent quarter, Alcoa's debt-to-capital ratio stood at 34.5%, meaning there's very little wiggle room left.

A Foolish look ahead
Aluminum giant Alcoa is an economic bellwether in the United States, as it serves a wide range of industries across the globe. Its quarterly reports mark the unofficial start to earnings season. And, since Alcoa has made some solid progress through the first nine months of the year, investors will be eager to find out whether the company can keep its momentum going. Alcoa's full-year goal is to become free cash-flow positive, and it has outlined several strategic initiatives to help it meet that goal. Investors will find out on Thursday whether management has executed.

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