On Monday, Alcoa (NYSE:AA) reported mixed earnings. A big help was being able to split the business into two different entities. aluminium prices rising during the quarter was a huge help as well.
Aluminium is forecasted to grow at a higher rate, and that bodes well for the rest of the year. Alcoa’s stock jumped 2% in after-hours trade as soon as the results were released.
Earnings beat
Alcoa reported that it had earned $0.63 cents per share, compared to analysts expecting $0.53. The earnings number was good, however, revenue fell short of expectations.
It was reported that the company had earned $2.66 billion for the quarter. The problem is that was way below analysts’ expectations that it would report $2.97 billion. The large gap in revenue is concerning. That can possibly be fixed as Alcoa management continues to restructure the business.
Some actions of restructuring the business include consolidating its administrative locations and separating its business segment into three entities. The split into three entities include: aluminium, alumina, and bauxite.
Big split
This earnings report was an important one for the company, because it was the first quarter as a standalone company. In November of last year, Alcoa had split the company into two different entities. The first named Alcoa kept its name, and was coined the aluminium part of the business.
The new entity known as Arconic (NYSE:ARNC) was the entity responsible for the automotive and aerospace industries. The key takeaway from this earnings report is that Alcoa performed pretty well as a first time standalone entity.
Price increase
A big reason behind Alcoa beating on its earnings expectation was the price increase seen in aluminium. Aluminium prices have gained up to 15% this year alone. In other words, it has been the best performing metal trading on the London exchange.
The point is that things can get better for aluminium as a commodity. That could happen if China starts to eliminate capacity of aluminium. Back in the early 2000s China was a very small producer of aluminium. Today, it is the largest producer of aluminium. It accounts for more than 50% of global aluminium supply. Therefore a slight pullback on production, may yield higher prices. That in turn would be a boost for aluminium-based companies such as Alcoa.
Better forecast
Alcoa may have better luck on earnings in the following quarters. That is because the company expects aluminium demand to increase between 4% to 5% in 2017. In the end, it expects a moderate pickup in surplus of aluminium between 300,000 metric tons to 700,000 metric tons.
This improved outlook for demand should boast well for the rest of the year. Demand picking up will not only increase prices, but also boost profit as well. Alcoa stated that it expects its 2017 EBITDA to be between $2.1 billion to $2.3 billion.
What traders should watch for
There are a few things that traders should watch for.
The first of which is to keep an eye on the next earnings report. While Alcoa beat on the EPS front, it came in below expectations on revenue. The key would be to see if the company can at least come close to or beat next quarter’s revenue expectation.
The second item would be aluminium prices. As aluminium prices start to rise that will mean increased revenue for Alcoa. What should also be monitored is to see if China pulls back on its aluminium output. That would be another determining factor in seeing a price increase.
The final item that traders should keep an eye on would be how much demand there is for aluminium. A drop off in demand will mean a smaller than expected forecast for the rest of the year. Only if demand increases substantially will Alcoa remain profitable for the year.