Is Alcoa a Buy Post-Earnings?

With shares of Alcoa (NYSE:AA) trading around $15, is AA an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Alcoa is engaged in the production and management of aluminum, fabricated aluminum, and alumina combined through its participation in technology, mining, refining, smelting, fabricating, and recycling. Alcoa’s products are used worldwide in aircraft, automobiles, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial applications. The company’s operations consist of four worldwide segments: Alumina, Primary Metals, Flat-Rolled Products, and Engineered Products and Solutions.

Alcoa is the world’s third largest producer of Aluminum. Coming to second-quarter results, revenue has increased by 7 percent on the year to $5.8 billion. The stock has EPS of 12 cents with a net income of $138 million, in line with the Street’s expectations. Q2 highlights include the announcement to acquire jet engine component manufacturer Firth Rixson, which is a global leader in the jet engine component manufacturing sector. It also invested $125 million in APP (Alcoa Power and Propulsion); revenues of APP are expected to reach $2.2 billion by 2016.

T = Technicals on the Stock Chart Are Strong

Alcoa stock has been trending higher over the past several months. The stock is currently trading near highs for the year and looks set to continue this path. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Alcoa is trading above its rising key averages, which signals neutral to bullish price action in the near-term.

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Alcoa options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Alcoa Options

27.75%

0%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of Wednesday, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Alcoa’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Alcoa look like and more importantly, how did the markets like these numbers?

2014 Q2

2014 Q1

2013 Q4

2013 Q3

Earnings Growth (Y-O-Y)

9.09%

-223.08%

-1,087.31%

184.62%

Revenue Growth (Y-O-Y)

-0.22%

-6.50%

-5.31%

-0.57%

Earnings Reaction

4.85%*

3.75%

-5.42%

2.01%

*As of this writing.

Alcoa has seen rising earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have been pleased with Alcoa’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Alcoa stock done relative to its peers – Aluminium Corp. of China (NYSE:ACH), BHP Billiton (NYSE:BHP), and Noranda Aluminum (NYSE:NOR) — and sector?

Alcoa

Aluminium Corp. of China

BHP Billiton

Noranda Aluminum

Sector

Year-to-Date Return

46.66%

5.75%

3.18%

24.62%

12.18%

Alcoa has been a relative performance leader, year-to-date.

Conclusion

Alcoa is a an aluminum producing and supplying giant all around the world. The company on Tuesday reported earnings for its second quarter, which left investors pleased. The stock has been trending higher over the past several months and is currently trading near highs for the year. Over the last four quarters, earnings have been mixed while revenues have been declining. Relative to its weak peers and sector, Alcoa has been a year-to-date performance leader. Look for Alcoa to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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