On Tuesday in the after-hours, Alcoa (AA) announced its quarterly earnings. The company reported a small loss but still beat the analyst estimates as the analysts were expecting the company to post a larger loss. In addition, the company expects to see a minor slowdown in demand in the short term.
The company's total loss for the quarter was $172 million, which comes down to 13 cents per share. Excluding the one-time costs, the company earned 3 cents per share, beating the average analyst estimate of breaking even or 0 cents per share. The company's revenue of $5.83 billion was slightly better than the analyst estimates, even though it fell from $6.42 billion since the same quarter last year.
The company also cut its future guidance as it expects the global aluminum demand to grow by 6% in the next year as opposed to the company's previous estimate of 7%. The company expects demand for aluminum to increase globally; however, the demand will not be as strong as once thought in China. Another thing that hurts the company's growth prospects is the aluminum price, which is currently cruising near 3-year lows. The company expects the Chinese demand to pick up after the fourth quarter due to the highly anticipated Chinese fiscal stimulus. Most of the demand for the company's products is expected to come from the automobile and airplane industries.
The long term investors of Alcoa haven't been too happy with their returns in the last several years. After peaking in 2007 at $47.35, the company's share price found bottom at $5.22 in 2009. After the great recession, the stock price had recovered all the way up to $17.92; however it started to fall again once the effects of the past two quantitative easing operations wore off. Since 2011, the stock price is off by nearly 50%.
If the IMF's warning materializes, this might be very bearish for material producers like Alcoa. IMF expects a major slowdown in the global economy, with many countries are expected to be trapped in recession for the short term or medium term. After this warning, Alcoa might end up providing a darker guidance for the future. The company expects aluminum demand to double between 2010 and 2020 and it is too early to tell whether this will actually happen.
It looks like Alcoa's future growth rate will depend on two things: 1) how well the car and airplane industry grows, and 2) how well aluminum price improves. Even if things improve greatly elsewhere, they are likely to remain sluggish in Europe. Car companies are closing plants and cutting on production in the continent. The trend is not likely to get better for at least a few years. The airplane industry is doing relatively well, because many airlines are replacing their old planes with newer and more fuel efficient ones. The two industries are likely to balance each other out and provide a moderate rate of growth for Alcoa.
Even though the company has lost a lot of market value in the recent years, it still isn't a value play. As the company's total debt just passed its market value of $9.5 billion and its earnings fall sharply, it will be a long time before Alcoa provides any value. For example, the company is expected to earn $1.1 per share in 2015, which would give it a future P/E ratio of 8 and this is not very impressive given that 2015 is 3 years away. Companies like Caterpillar (CAT) and Boeing (BA) provide much better valuation and growth prospects. The company's low dividend yield of 1.3% doesn't make it very attractive either. Keep in mind that Alcoa's annual revenue totals more than double of the company's market share; however, the company's margins are very low due to its inability to cut costs over the years.
Just because a company beat estimates doesn't mean it is a great investment. Alcoa is an average investment and I don't expect it to perform above and beyond the market itself. Until the company improves its razor thin margins (i.e., $32 million operating profit out of $5.8 billion revenue), or until the aluminum prices improve greatly, I don't see Alcoa as a great investment. Those that are interested in heavy industries will find better value in Boeing and Caterpillar, as these are two of my favorite heavy industry companies at the moment.
Back to the question: is Alcoa's report bullish or bearish? I would say it's as mixed as it gets. There were positives and negatives which would balance themselves out. The company is not a terrible investment; however, the risk-reward ratio doesn't really justify investing in it at the moment.