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Why Shares of Alcoa Are Falling Today

By Lou Whiteman – Oct 15, 2020 at 11:00AM

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Earnings were better than expected. The outlook was not.

What happened

Shares of Alcoa (AA) fell 10% on Thursday morning following the company's third-quarter earnings release. Results actually came in ahead of expectations, but investors were more focused on the company's weak forecast for the months ahead.

So what

After markets closed Wednesday, Alcoa reported a third-quarter loss of $1.17 per share on revenue of $2.37 billion, topping expectations for a $1.38-per-share loss on sales of $2.2 billion. Alcoa generated $84 million in free cash flow during the quarter and managed to grow adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 54% from the prior quarter thanks to improving demand for aluminum.

Large rods of aluminum in a warehouse.

Image source: Getty Images.

The company also raised $750 million in new debt during the quarter, giving it a cash balance of $1.74 billion. And Alcoa said it is on pace to deliver about $900 million in cost savings and 2020.

"Across all of our segments, we are delivering solid results and continuing to improve overall performance," CEO Roy Harvey said in a statement. "We also boosted our company's liquidity, so we have even greater flexibility to execute on our strategy."

Alcoa's business has been hit by the COVID-19 pandemic, which has led to declines in industrial production and caused a corresponding fall in demand for aluminum and other metals. Though revenue in the quarter was higher than analysts had expected, it was down from $2.57 billion in the third quarter of 2019.

Now what

While the third quarter came in better than feared, Alcoa didn't give investors much to get excited about for the rest of the year. The company said it expects alumina and aluminum results to slip in the fourth quarter due to higher energy costs and a change of mix in customer shipments.

Alcoa also expects to feel the impact of a full quarter of tariffs, plus higher maintenance and seasonal labor costs.

Alcoa shares are off 45% for the year, and for investors right now the only choice is to wait out the pandemic and hope for an economic rebound once it is behind us. The third-quarter results gave every indication that will be a long wait, and the shares are under pressure Thursday as a result.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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