Here's Why Alcoa's Momentum May Not be Built Ford Tough

Materials giant Alcoa (NYSE: AA  ) has been on a tear over the past few months. Since being booted from the Dow Jones Industrial Average, it's had the last laugh as its stock price has climbed considerably in a relatively short amount of time. A lot of optimism is built into Alcoa's rally based on firming aluminum prices and the prospect of a steady global economic recovery.

At the same time, there may be cracks forming in Alcoa's bull case. Why? Well, it's still grappling with high costs and inconsistent profitability. These may be compounded going forward now that Alcoa has cut production in Brazil. While investors are likely cheering Alcoa's recent momentum, whether it can continue remains to be seen.

A potential catalyst for 2014, after a disappointing 2013
From an operating standpoint, Alcoa is still stuck in the mud. Last year, the company booked a $2.3 billion loss, due primarily to a $1.7 billion goodwill impairment charge. Of particular concern was that its core metrics deteriorated, casting doubt on whether the company is out of the woods or not. Revenue fell by $700 million in 2013, due primarily to a 4% decline in realized aluminum prices.

At the same time, it seems there's a fair amount of optimism baked into Alcoa's rise. This buoyancy stems from a few promising developments that have emerged recently. For example, Ford (NYSE: F  ) announced its new line of pickup trucks will feature an aluminum alloy that results in lighter vehicles and greater fuel efficiency. Its 2015 F-150 line will employ what Ford labels a 'military-grade aluminum alloy' in the body and bed. The 2015 model will weigh 700 pounds less than its predecessor, and the new aluminum alloy is more easily recycled. This means greater fuel efficiency and minimized waste.

Alcoa will very likely benefit from this, since its automotive division is a major part of its business. Alcoa projects aluminum use in automotive parts will double by 2025. Based on the facts that Alcoa is the largest aluminum producer in the world and the F-150 is the most popular vehicle in the United States, a budding partnership should have significant results for Alcoa.

Not an entirely rosy outlook
Still, Alcoa continues to grapple with underlying supply constraints. The company is curtailing capacity at two smelters in Brazil in response to poor pricing and increased costs. These forces have combined to make ongoing operations at the smelters uncompetitive.

Production capacity at these smelters is pegged at 147,000 metric tons. The decision is part of a broader review process in which Alcoa is rethinking production at facilities with the highest operating costs. Going forward, Alcoa revealed it could halt as much as 800,000 tons, or 21%, of its total capacity.

This is a significant curtailment of production that will weigh on the company's near-term results. Alcoa warned it will likely incur a $0.05 per-share charge in the first quarter. Idling its Brazil smelters is a continuation of a disturbing trend for Alcoa. It's also going to curtail production at a smelter in Australia which will result in a 190,000-ton decline in production. Last year, it shut down facilities in the United States, Canada, and Italy again involving 190,000 tons of capacity. These are the primary factors that have weighed on Alcoa's recent operating results.

Alcoa offers a mixed picture
Alcoa has rallied strongly in just a couple of months, which may give investors a sense of optimism. Indeed, the steady global economic recovery and recent developments out of Ford could pave the way for a more profitable future.

However, Alcoa isn't out of the woods just yet. It continues to suffer from production shut-downs which were a major reason behind the massive loss incurred last year. Hopefully, the newest rounds of production curtailments are a short-term issue. Otherwise, the benefits of a potential partnership with Ford may be over-shadowed.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 01, 2014, at 10:47 AM, stockmajor wrote:

    Maybe Alcoa isn't "out of the woods" just yet, but what does that mean ultimately? I don't see them going out of business any time soon.

    This company has been making all of the right moves to deal with a very difficult economic situation. Curtailing the alumina side of the business and focusing on increasing the value added side are wise moves that will be leading to greater and greater profitability going forward.

    Alcoa stock value will eventually return to $30 plus a share. That's fantastic for us long term holders. In the short term the trend is your friend, until it isn't.

  • Report this Comment On April 01, 2014, at 11:15 AM, retrobeast wrote:

    Why do you idiots have to put out a negative article on a day AA has nice momentum?

    Shut your freakin pie holes !

    Nobody likes the Motley Tool articles and they are published only to manipulate stocks.

  • Report this Comment On April 01, 2014, at 2:07 PM, pbensh77 wrote:

    I just read an article regarding Alcoa is expanding production in Brazil to meet specialty packaging demand.

    Then you say , "These may be compounded going forward now that Alcoa has cut production in Brazil."

    Did you read the same news that the market has put out regarding Brazil and AA? Or are you just trying to cover your short sell?

  • Report this Comment On April 01, 2014, at 5:17 PM, toddphoto wrote:

    Sure, there are a lot of fundamental issues for Alcoa, but that is what happens when a company hits rock bottom before running forward. The deals with Ford, expanded use of aluminum by other car makers including GM, Tesla and Mercedes Benz, will expand the need for their product.

    Also, backlog in airplane orders in aerospace will built up Alcoa for the future. And don't forget the new aluminum bottle for Coke and others will follow the new lightweight containers.

    Forward projections, and not a single quarter earnings will drive us higher. May be not be the leaps and bounds we have seen, but certainly all indicators, including a bottoming out of commodity prices, will help keep this company moving in the right direction.

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