Here’s What Alcoa’s Blowout Quarter Means for Investors

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Alcoa (NYSE:AA) officially kicks off earnings each reporting season. And what a dandy of a report Alcoa just gave. I dare to say, it may even reverse the trend of a downward market. For those who are unfamiliar with this bellwether company, Alcoa produces and manages primary aluminum, fabricated aluminum, and alumina.  The company’s main competition is the Aluminum Corp. of China (NYSE:ACH).

Shareholders of Aluminum Corp. of China should take note of this report, because it bodes well for the company. Like Aluminum Corp. of China, Alcoa is a metals company. The company operates in four segments: Alumina, Primary Metals, Global Rolled Products, and Engineered Products and Solutions. The Alumina segment is engaged in mining of bauxite, which is then refined into alumina. The Primary Metals segment produces aluminum. The Global Rolled Products segment produces and sells aluminum plate, sheet, and foil.

The Engineered Products and Solutions segment produces and sells titanium, aluminum, and super alloy investment castings; fasteners, aluminum wheels, integrated aluminum structural systems, architectural extrusions, and hard alloy extrusions. Its products are used in aircraft, automobiles, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial applications. The company has operations primarily in the United States, Australia, Spain, Brazil, France, the Russian Federation, Hungary, the Netherlands, Norway, the United Kingdom, China, Germany, and Italy. Just how good was the report?

Well, Alcoa saw net income of $138 million, or 12 cents per share. That’s amazing, considering expectations were much lower. In fact, excluding special items, analysts thought earnings would be 12 cents per share. But Alcoa blew the numbers out of the water. Excluding special items, net income was $216 million, or 18 cents per share, up sequentially and year over year. This truly caught me by extreme surprise, and I believe this start to earnings season will have a reverberating effect through the market.

Even revenue was a beat. Revenue came in at $5.8 billion, up 7 percent sequentially, and about steady from the prior-year period. The segments had some stellar performance, too. For example, the Engineered Products and Solutions segment delivered the highest after-tax operating income in the history of the company, coming in at $204 million. It also had record adjusted EBITDA margin of 23.1 percent. The Global Rolled Products segment saw huge sequential growth. In fact, this segment’s after-tax-operating income was up 34 percent sequentially.  Further, the company’s upstream business improved its performance for the 11th consecutive quarter. That is evidence alone the economy, at least for metals, anyway, may finally really be improving.

What’s more, the company saw $302 million in productivity gains across all segments year over year. Further, the company has the lowest net debt it has ever had since third-quarter 2007, around the height of the pre-recession stock market. The company now has cash on hand of $1.2 billion, positioning it incredibly well moving ahead. Alcoa generated $518 million cash from operations and reported $260 million positive free cash flow. This is one of the best quarters I have seen from Alcoa in a long time. 

Look, I will be honest. We cannot predict the market’s earnings reports from one company. But let’s face facts: Alcoa has been a dog of a stock for years, trading between $8 and $14 for years. Now, it is set to break out. I think that the quarter bodes well for the rest of the companies set to report, especially those in similar sectors dealing with metals. The metals sector had been weak for a long time.

Now, it is about to change. In fact, global aluminum demand growth is forecast to rise 7 percent in 2014, and the company reaffirmed this belief while also stating that the global aluminum deficit is increasing and the global alumina surplus is shrinking. This report sets Alcoa up to do nicely moving ahead, and I am very excited to see what earnings season brings us over the next few weeks.

Disclosure: Christopher F. Davis holds no position in Alcoa.

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