Why Alcoa's Results Should Interest Cummins, Caterpillar, and Johnson Controls

Alcoa always gives good commentary on its end markets, and shareholders in Caterpillar, Johnson Controls, and Cummins should follow its report closely.

Jul 13, 2014 at 10:40AM

Alcoa's (NYSE:AA) earnings are always interesting because the company gives great guidance on the industrial economy. In addition, the earnings come at the start of the new earnings seasons, and they give Fools the chance to confirm whether Alcoa's commentary matches what their companies have been saying recently. In this regard, shareholders in Cummins (NYSE:CMI), Johnson Controls (NYSE:JCI), and Caterpillar (NYSE:CAT) should follow closely, Alcoa's management had a lot of interesting things to say.

Alcoa upgrades market forecasts, good for Cummins
A summation of Alcoa's end market guidance reveals that the only formal upgrade to its outlook was in the heavy truck and trailer market. The parts in green are where upgrades took place.

Alcoa

Source: Alcoa presentations

In fact, Alcoa started the year with a forecast of just 1%-5% growth in the North American heavy truck and trailer market, and has upgraded guidance twice since then. This matches what companies like truck engine manufacturer, Cummins, have been saying. Fools can see how Cummins (and the industry) upgraded its expectations for this year. While it's well known that the North American truck market is improving, investors in Cummins will be interested to hear that Alcoa's management gave a slight upgrade to expectations for China and referred to the market as "stabilizing." This is good news for Cummins, because it helps allay fears over uncertainty in the China market due to a move to a tighter emissions standard.

Aerospace and automotive
There were no changes to either end market forecast, but the commentary on the conference call remained positive for both industries. Alcoa referenced industry forecasts that point to a 5.9% increase in passenger demand, and 3.1% increase in cargo demand. The latter is interesting because it implies a pickup in global trade -- good news for UPS and FedEx. In addition, Alcoa's management referred to the ongoing rebound in regional and business jets, and Fools can read about some stocks set to benefit.

Turning to automotive, management discussed industry data pointing to North American car inventory standing at 59 days when the historical average is 62-65; this indicates that inventory is too low (provided sales carry on increasing) and car production should increase going forward. This would be good news for car parts manufacturer Johnson Controls. Investors are already hoping for a bounce back in its power solutions (car batteries) in Europe following an unusually warm winter. Moreover, given an ongoing recovery in car production in North America, investors in Johnson Controls can expect continued strong demand in its automotive experience (principally seating) segment, too.

Commercial building and construction, industrial gas turbines
No changes here, but Alcoa's management referred to "very positive early in indicators" in building and construction markets in North America. Moreover, Alcoa keeping guidance constant is, arguably, good news, because North America was hit by severe weather in the winter, which curtailed a lot of construction activity. It's also interesting that Alcoa did not reduce guidance for China, despite signs of economic weakness in the country. If Alcoa's commentary is accurate, then Johnson Controls (through its building efficiency segment) and Caterpillar (construction machinery segment) could outperform in the second half. Indeed, Caterpillar has already upgraded its expectations for construction machinery sales this year.

Moreover, Alcoa's management, in discussing industrial gas turbine demand, also referred to spares demand by saying, "We do see a negative impact from the shift in the energy mix in the usage in key regions." Essentially, the cold winter has increased natural gas prices, and coal has made somewhat of a comeback in terms of energy usage.

Henry Hub Natural Gas Spot Price Chart

Henry Hub Natural Gas Spot Price data by YCharts

This is potentially good news -- if only for the short term -- for the resource machinery market that Caterpillar services.

The bottom line
All told, it was a positive report from Alcoa that indicated good underlying conditions in the industrial economy. The best news came in the heavy truck sector where Cummins can expect to do well in 2014. The two strongest areas of the industrial sector, aerospace and automotive, continue to do well. Johnson Controls may see some upside from the latter in the second half. Caterpillar is already benefiting from an improved construction market -- which Alcoa confirmed -- and it may see some stabilization with its mining equipment, if coal production increases in the U.S. In short, a good report for the industrial sector, with plenty of takeaways for Fools to ponder.

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Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Cummins. The Motley Fool owns shares of Cummins. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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