Alcoa's Earnings Bode Well for the Broader Market

Alcoa (NYSE: AA  ) , the first U.S. company to report earnings each season, reported expectation-beating results after last night's market close. While it's no longer a member of the Dow Jones Industrial Average (DJINDICES: ^DJI  ) , Alcoa still is relevant to the Dow, as it is a bellwether of economic activity. As of 1:20 p.m. EDT the Dow was up 48 points to 16,955. The S&P 500 (SNPINDEX: ^GSPC  ) was up six points to 1,970.

Alcoa is up 6% today to $15.73 after both its revenue and earnings beat expectations. Year to date, Alcoa is up 48%, as the stock was priced far too low at the end of 2013. Revenue came in at $5.84 billion, down slightly from the year-ago $5.85 billion and better than expectations of $5.63 billion. Adjusted earnings were $0.18 per share, above the prior-year quarter's $0.07 per share and expectations of $0.12 per share.

Perhaps more importantly, Alcoa still expects worldwide aluminum demand to rise 7% in 2014. Aluminum is used throughout the economy, so growth in aluminum demand points to sustained growth in industrial activity. This is encouraging, as GDP growth disappointed around the world in the first half of the year.

For its own part, Alcoa has been aggressively shutting down its highest-cost plants and focusing on high-value added markets as the basic aluminum market has been oversupplied for a few years, which has led to a massive drop in prices over the past three years or so.

Source: IndexMundi.com.

As prices have remained low, high-cost producers have been hemorrhaging money, which is finally driving out some of the weakest players in the market. As demand rises -- particularly in higher-margin specialty applications such as jet bodies, where there are significant backlogs among the large jet-producers -- Alcoa will benefit while basic operators will continue to struggle. Another piece of this strategy was Alcoa's acquisition last month of jet-engine parts manufacturer Firth Rixson for $2.85 billion. If global demand picks up, Alcoa is in a prime position to benefit.

This same story is playing out across the markets. Companies must increasingly push into value-added businesses or risk getting bogged down in low-margin, commoditized competition.

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