Alcoa Earnings: Can the Aluminum Giant's Turnaround Continue?

Next Tuesday, Alcoa (NYSE: AA  ) will release its quarterly report, and shareholders are unusually excited about the traditional start to the quarterly earnings season. Alcoa stock has been on fire, even as it, Rio Tinto (NYSE: RIO  ) , and the rest of the industry continue to grapple with oversupply and the need to reduce capacity. Nevertheless, Alcoa shareholders have high hopes that higher demand from automaker Ford (NYSE: F  ) as well as the aerospace industry could help end the supply glut and send prices much higher.

In recent years, Alcoa has been a victim of the slowing pace of growth in the global economy, with emerging markets in particular cutting back on their construction and infrastructure spending and therefore reducing demand for aluminum even as producers have increased supply. Yet Alcoa has worked hard to distinguish itself from Rio Tinto and its peers by emphasizing high-margin products over simple commodity metal. With such huge share-price gains, though, can Alcoa keep soaring? Let's take an early look at what's been happening with Alcoa over the past quarter and what we're likely to see in its report.

Stats on Alcoa

Analyst EPS Estimate

$0.12

Change From Year-Ago EPS

71%

Revenue Estimate

$5.66 billion

Change From Year-Ago Revenue

(3.3%)

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Can Alcoa earnings surprise investors again?
Investors have boosted their views on Alcoa earnings in recent months, raising second-quarter estimates by 20% and full-year 2014 projections by almost 30%. The stock has kept up its strong performance, climbing almost 20% since late March.

Alcoa's first-quarter earnings showed the extent to which the aluminum giant has started to recover. Adjusted earnings almost doubled expectations, with CEO Klaus Kleinfeld arguing that Alcoa's efforts to offer value-added products rather than raw metal were bearing fruit. Even as the company has cut back on smelting capacity, it has emphasized projects that produce high-margin goods, such as the automotive components that Ford has used to reduce the weight of its 2015 F-150 pickup truck. That, in turn, could allow earnings to jump even during times when revenue drops, as investors saw in the first quarter and expect for the second quarter as well.

Source: Alcoa.

Alcoa is getting a lot of help from several of its core industries. The company sees aluminum-can production and commercial building use making steady contributions to Alcoa's overall growth, but the areas in which it has recently boosted its growth estimates are in aerospace and heavy truck trailer applications, as well as the auto industry. All three of these industries need lighter-weight yet durable materials in order to reduce weight and increase fuel efficiency for customers that are increasingly sensitive to operating costs.

Moreover, aluminum prices are finally cooperating with Alcoa's long-term strategy. Chinese producers continue to add output to the market, and that's holding back Alcoa, Rio Tinto, and other global aluminum makers from moving prices higher to boost profits. But lower-cost production facilities have helped companies boost margins, with Alcoa itself seeing its joint venture in Saudi Arabia operate at huge cost discounts compared to other facilities. With aluminum prices having risen toward yearly highs recently, Alcoa might finally start to see the upswing it has waited for.

In the Alcoa earnings report, watch for updates on two major recent events: its plan to build jet engine parts at a plant in Indiana and its $2.85 billion buyout of aerospace specialist Firth Rixson. Even with extensive debt, Alcoa's confidence in better times ahead could help drive share prices even higher if it can deliver on the earnings front.

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