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Alcoa Off to the Earnings Races

By David Smith – Updated Apr 5, 2017 at 8:36PM

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The aluminum producer kicked off earnings season, but its news wasn't pretty.

The first of the major companies to report earnings offered up results that were anything but stellar Tuesday. Alcoa (NYSE:AA), which little more than a year ago was on the acquisition trail, announced that its third-quarter earnings were down 52% year over year, that it's suspending its share buyback program, and that it's stopping all non-essential capital spending.

For the quarter, the Pittsburgh-based company earned $268 million, or $0.33 a share, versus $555 million, or $0.63 a share, in the third quarter of 2007. The most recent numbers included a $0.04 charge for the curtailment of the company's Texas smelter and a $0.25 gain from the sale of its position in Aluminum Corp. of China (NYSE:ACH).

The earnings decline for the quarter related to the global economic decline, which has crimped aluminum prices by about a third since they reached a record high near $3,400 a metric ton in July. Aluminum has a variety of applications, including airplane, automotive, and tractor-trailer parts. With U.S. auto sales sliding like tots on a playground, you can bet that North American demand and prices haven't yet found a bottom.

Nevertheless, Alcoa's CEO Klaus Kleinfeld indicated that the company expects demand in China to expand by about 15% this year, a prediction that's down from his previous 22% forecast. He also is betting that demand will grow in the rest of Asia, Eastern Europe, and Brazil. But despite a somewhat stronger dollar and slipping energy costs, Kleinfeld doesn't anticipate that those areas will offset the softness in North America and Western Europe.

As a result, Alcoa will cease buying back its shares for a time, and it will make other unspecified cuts in its manufacturing capacity. Along with layoffs in Texas, the company also has cut 1,200 jobs in Mexico and Honduras.

In 2007, Alcoa attempted to acquire its Canadian rival Alcan, but was thwarted by a higher bid from Rio Tinto (NYSE:RTP). And as the food chain continues, Rio is now being pursued by Australia's mining giant, BHP Billiton (NYSE:BHP). More recently Alcoa itself has been discussed as a possible acquisition target for Brazil's Vale (NYSE:RIO).

So the first shot out of the earnings gun was little more than a pop. Watch for similar declines at smaller aluminum producers Century Aluminum (NASDAQ:CENX) and Kaiser Aluminum (NASDAQ:KALU). Don't be surprised if these companies have a lengthy spell in which to prove their mettle.

Alcoa earns three stars (out of five) from Motley Fool CAPS players. Why not weigh in with your opinion?

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Fool contributor David Lee Smith does not own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.

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Stocks Mentioned

Alcoa Inc. Stock Quote
Alcoa Inc.
AA
BHP Group Stock Quote
BHP Group
BHP
$48.87 (-4.57%) $-2.34
Rio Tinto plc Stock Quote
Rio Tinto plc
RIO
$52.16 (-5.76%) $-3.19
Kaiser Aluminum Corporation Stock Quote
Kaiser Aluminum Corporation
KALU
$63.30 (-4.47%) $-2.96
Aluminum Corporation of China Limited Stock Quote
Aluminum Corporation of China Limited
ACH
$8.75 (-6.92%) $0.65
Century Aluminum Company Stock Quote
Century Aluminum Company
CENX
$5.95 (-6.15%) $0.39

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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