Will Recent Earnings Boost Alcoa?

With shares of Alcoa (NYSE:AA) trading around $8, 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 kicked off earnings season after the bell on Monday, and Alcoa beat analyst expectations despite the falling price of aluminum due to cost-cutting measures and increased demand from automakers. Earnings per share came in at 11 cents, more than double analyst forecasts of 5 cents. Revenue came in at $5.8 billion. Alcoa posted a profit of $24 million versus a loss of $119 million a year ago and reaffirmed its guidance for the year.

T = Technicals on the Stock Chart Are Mixed

Alcoa stock has struggled to make positive progress in recent months. The stock is now trading near the top end of a multi-month range, so it may need time to consolidate at current prices. 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 key averages, which signals neutral to bullish price action in the near term.

AA

Source: Thinkorswim

Taking a look at the implied volatility 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

33.87%

50%

48%

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

Put IV Skew

Call IV Skew

October Options

Flat

Average

November Options

Flat

Average

As of Wednesday, there is 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 significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

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?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

184.62%

44.44%

221.89%

-186.67%

Revenue Growth (Y-O-Y)

-0.57%

-1.91%

-2.88%

-1.52%

Earnings Reaction

4.41%*

-0.12%

-0.00%

-0.21%

Alcoa has seen rising earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Alcoa’s recent earnings announcements.

* As of this writing

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

Aluminum Corp. of China

BHP Billiton

Noranda Aluminum

Sector

Year-to-Date Return

-5.47%

-25.40%

-16.90%

-63.60%

-10.47%

In a weak sector, Alcoa has been a relative performance leader, year to date.

Conclusion

Alcoa is a an aluminum producing and supplying giant all around the world. A recent earnings release has investors upbeat about the company. The stock has not made significant progress in recent years and is now trading near the top end of a multi-month range. Over the last four quarters, earnings have been rising while revenues have been declining, which has produced conflicting feelings among investors about recent earnings announcements. Relative to its weak peers and sector, Alcoa has been a year-to-date performance leader. WAIT AND SEE if Alcoa can break above its recent range.

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