Alcoa's (NYSE: AA ) results and guidance always serve as a useful indicator for what sectors of the industrial economy are going to do well in the coming quarters. With regard to its latest results, the upgrade to its full-year end demand for the North American heavy truck and trailer market is obviously good news for truck maker Paccar (NASDAQ: PCAR ) and engine manufacturer Cummins (NYSE: CMI ) . In addition, Alcoa gave a positive outlook for the U.S. construction market; this should interest shareholders in Ingersoll-Rand (NYSE: IR ) . Despite the recent market sell-off, there is some good news out there.
Alcoa updates the market
The following table provides an update on Alcoa's end market guidance for 2014 vs. 2013. The sections in green are where guidance was upgraded from the previous quarter.
Alcoa's guidance on the aerospace and automotive sectors was discussed in an article linked here, while this article will focus on the commercial building and heavy truck and trailer segments.
Weather and construction
The big question hovering over the commercial construction sector is whether the weakness in the recent quarter is merely a weather related fluke, or if it's a more symptomatic issue. With this kind of consideration in mind, it's understandable if Alcoa kept its guidance unchanged for the segment. If you think it's weather, then there is a good reason to suspect that a company like Ingersoll-Rand (67% of its segmental income for 2013 came from its climate division) is giving conservative guidance. On the other hand, Ingersoll-Rand's traditional strength is in institutional business, and the company forecasts a decline by 1% in 2014.
Turning back to Alcoa, its commentary came down on the positive side of the argument. Speaking about its North American market, CEO Klaus Kleinfeld said on the conference call:
As these sites got delayed ... people are now trying to catch up and trying to make the days that they had projected for their project, so we continue to be optimistic in the recovery of that market and don't believe that there is any substantial change in this; it was really weather that hit there.
In other words, Alcoa is seeing its orders pick up again, and so should the rest of the construction industry.
Heavy truck and trailer
The North American operations of this segment saw the most dramatic increase in guidance, with the previous estimate of growth of 1% to 5% being increased to 5% to 9%. This is good news for Paccar and Cummins, as both companies have heavy exposure to the North American market.
There is a useful primer on the underlying dynamics in the industry linked here. Earlier in the year, Cummins -- a manufacturer of engines for Paccar and Navistar among others -- had forecast that market growth would contribute just 1% of the 6% revenue growth (mid-point) that it expects for the full year. If Alcoa's outlook is accurate, however, then Cummins may see better-than-expected growth in 2014. Similarly, Paccar may see its U.S. and Canadian heavy-duty truck sales surpass its 210,000-240,000 estimate for this year.
Eagle-eyed readers will note that the European heavy truck and trailer outlook was also raised, but Alcoa's management was careful to point out that they believed this was more to do with supply chain issues created by regulatory shifts in Europe.
The bottom line
All told, Alcoa's report was pretty strong for companies like Ingersoll-Rand, Paccar, and Cummins. However, it's noticeable that it didn't upgrade any segment of its China-based demand. On the other hand, macro views can also be put together from a bottom-up basis by piecing together information from myriad company outlooks, and the conclusion from Alcoa's report is broadly positive. Emerging market risk still remains, but the evidence from Alcoa is that North America continues to outperform and Europe is in tentative recovery mode.
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