Alcoa (NYSE: AA) kicked off earnings season and, as usual, gave a detailed end-market outlook for the year ahead. It's useful information, not only for Alcoa followers but for the industrial sector and Alcoa clients like General Electric Company (NYSE: GE) and Boeing (NYSE: BA). Moreover, Alcoa's end-market commentary gives clues as to what to expect from industrial companies' earnings reports in the coming weeks. Let's take a closer look.
| Segment |
2016 Growth Outlook |
|---|---|
|
Aerospace |
8% to 9% |
|
Automotive |
1% to 4% |
|
Heavy-duty truck and trailer |
(3%) to 1% |
|
Packaging |
1% to 3% |
|
Building and construction |
4% to 6% |
|
Industrial gas turbines |
2% to 4% |
Data source: Alcoa.
Aerospace and industrial gas turbines
The aerospace sector remains the strong point of the industrial sector, and Alcoa's forecast keeps pace with the growth achieved in 2015. Indeed, Alcoa signed multiyear agreements with Boeing and General Electric's aviation arm in the fourth quarter. Moreover, within aerospace, large commercial aircraft growth is expected to be around 15% based on production ramps on Boeing's 787 and Airbus' A320 and A350.
Image source: Boeing.
It mirrors the outlook from the International Air Transport Association which, in December, increased its forecast for worldwide airline net post-tax profits in 2015 to $33 billion from $29.3 billion previously. All of which indicates good order books for Boeing's aircraft and General Electric's engines.
There was more positive news for General Electric from Alcoa's industrial gas turbine outlook. The growth forecast is in line with last year's range, and Alcoa CEO Klaus Kleinfeld sees the market moving toward new, high-efficiency turbines, an example of which is General Electric's H turbine. Alcoa's presentation claimed the 60Hz (primarily found in the U.S.) gas-fired turbine market was up 17.9% year to date to October, and Kleinfeld claimed the "50Hz gas turbine market is starting to show some light again" -- suggesting that European demand could be about to pick up.
| Segment |
North America |
European Union |
China |
|---|---|---|---|
|
Automotive |
1 to 5% |
1% to 4% |
2% to 5% |
|
Heavy-duty truck and trailer |
(19%) to (23%) |
3% to 7% |
1% 4% |
|
Packaging |
(1%) to flat |
1% to 2% |
5% to 8% |
|
Building and construction |
4% to 6% |
0 to (2%) |
3% to 5% |
Data source: Alcoa.
Automotive and trucking
Alcoa's automotive outlook is positive across the board and calls for a pickup in Chinese growth. It's what automotive-focused customers like interiors and seating manufacturer Johnson Controls (JCI +0.85%) are saying. Like Johnson Controls, Alcoa's management sees a recovery in China supported by tax incentives on smaller and more fuel-efficient cars.
In addition, Alcoa's forecast for production growth in Europe (driven by export demand and strong trends in registrations) and North America (light truck demand is strong) is higher than Johnson Controls', suggesting the latter may raise estimates in future.
Image source: Johnson Controls.
Heavy-duty truck and trailer outlook sees the biggest change with North American demand switching from double-digit growth in 2015 to dramatic declines in 2016, while China flips from 20%+ declines in 2015 to single-digit growth in 2016. This implies some volatility in the sector as sales patterns get realigned.
Building and construction, and packaging
The housing and construction segment is arguably the most interesting of the industrial world in 2016. Similar to other companies exposed to construction trends, such as Johnson Controls through its building efficiency segment, Alcoa sees solid growth in North America, with China's growth slowing and Europe in negative territory.
However, China's construction growth is somewhat dependent on its industrial and manufacturing sectors, and as Alcoa's presentation noted, those sectors were weak in 2015. In addition, U.S. growth depends largely on housing, and while leading construction indicators are on a positive trend, they have been volatile.
The packaging outlook reflects the relatively stable nature of the industry, but it's interesting how weakness in carbonated soft drinks is reducing growth in North America, something Valspar referred to recently.
Key takeaways for earnings season
Commercial aerospace remains the strongest area of the industrial sector, so look out for companies affirming guidance. Alcoa joined the ranks of companies predicting a bounce back in China, and it will be interesting to hear what the automotive sector is saying about Chinese sales growth beyond the tax-incentive surge.
Construction seems to be an ongoing story of U.S. strengthening, but China slowing (although the amount and extent of the latter is hard to predict). Trucking promises a lot of volatility in company outlooks, and packaging may see some differences on a geographic basis.
