Aluminum giant Alcoa (NYSE: AA) just reported a 27% surge in revenue and a more than twofold jump in its bottom line for the second quarter. A major aluminum company covers a lot of major sectors and thus gives us insight into the broader economy. This makes it a worthwhile stock to delve into.
Financials
Alcoa's revenue grew 27% to $6.6 billion from the year-ago quarter. Record quarterly alumina revenue, higher alumina shipments, and a 7% higher realized price helped the top line grow. What is worth noting here is that most end markets such as commercial transportation, construction, and aerospace saw revenue growing, signaling an overall recovery in those sectors.
Including a special restructuring charge of $38 million, income from continuing operations came in at $326 million, up a staggering 138% from the same quarter last year. The bottom line more than doubled to $322 million from $136 million in the year-ago period.
Though higher revenue boosted profits, a weaker dollar, which fuels prices of commodities like alumina, weighed on margins. Dollar movements have a considerable significance for all metal players. For instance, BHP Billiton's (NYSE: BHP) operating income was reduced by $1.1 billion in the second half of 2010 because of the weak dollar.
Higher energy and input costs also offset Alcoa's revenues. The company's selling, general, and administration expenses margin improved, which is commendable, but ultimately not relevant for future growth. Along those lines, rising costs remain a concern. The company has the option to raise prices, just like Aluminum Corporation of China (NYSE: ACH) recently has, but in a market like this one, it's not an optimal strategy.
From a balance sheet perspective, Alcoa has $8.8 billion of long-term debts on its books. The good news is that the company maintains a debt-to-capital ratio of 30.6%. With the operating income jumping 74% from the year-ago period to $664 million and total cash standing at $1.2 billion, servicing debt doesn't look like a problem for Alcoa as of now.
Optimistic signs
Alcoa hit a bull's-eye at the recent Paris Air Show by bagging a $1 billion multiyear contract with Airbus for the supply of new alloys. The technology, which can reduce airliners' weights and improve fuel efficiency, is expected to find more takers in the future.
The New York-based company has also been asked by President Barack Obama to be a part of a national government-industries partnership effort to invest in new technologies to create high-quality jobs.
On a broader perspective, the U.S. government is focusing on building stricter fuel economy and emission standards, suggesting greater probable usage and demand of aluminum in automotives in the future.
Transportation equipment orders have also risen by 10.4% in the first half of this year, which is again good for Alcoa. Alcoa is also wisely focusing on the growing emerging markets, where aluminum consumption is anticipated to double in the next 15 years.
Overall, all these developments signal optimism for Alcoa.
Beneficial surge
Higher aluminum prices have helped Alcoa boost revenues. Alcoa's average realized aluminum price rose around 23% to $2,830 per metric ton, while aluminum production rose 6% to 945,000 tons from the year-ago quarter.
The shooting up of the light metal by 25% on the London Metal Exchange in a year's time, and surging demand from aerospace and automotive sectors, especially in the U.S. and China, is good news for Alcoa, since it will benefit both from rising demand as well as higher prices
The Foolish bottom line
Given the fact that Alcoa deals in a metal whose demand is expected to rise, and with the management expecting sales across all segments to grow this year, it's worthwhile to keep an eye on this stock.
