Alcoa Gets Earnings Season Off to a Strong Start

Source: Alcoa.

Traditionally, investors have marked the official beginning of each quarter's earnings season with the release of aluminum maker Alcoa's latest results. On the whole, that's been a profitable exercise for investors recently, as Alcoa's stock came into this afternoon's announcement having more than doubled since this time last year. With such a strong recovery, investors wanted to see more success from Alcoa in its third quarter, and almost universally, they were happy with what they saw in the report. Let's take a closer look at how Alcoa did in the third quarter and what it means for the company's longer-term future.

Alcoa's growth picks up steam

Alcoa's third-quarter earnings report continued the recovery it has seen in past quarters. Overall, the company earned $149 million, but those figures included a $221 million charge to cover the costs of restructuring its commodity business. The adjusted net income of $370 million translated to earnings per share of $0.31, easily topping investors' expectations for $0.23 per share and more than tripling its year-earlier adjusted profit. Revenue rose by 8% to $6.2 billion, with organic growth contributing about half of Alcoa's overall sales gains.

Source: Alcoa.

Once again, Alcoa got positive contributions from all of its business segments. The key engineered products and solutions division, which includes Alcoa's most specialized high-margin products, enjoyed a record quarter in terms of after-tax operating income. The midstream Global Rolled Products division saw impressive gains of 45% in after-tax operating income from year-ago levels, climbing above the $100 million mark for the quarter. And even Alcoa's commodity business, which focuses on the production of alumina and primary metals, saw better performance as lower costs helped the company reap greater profits from the segment.

CEO Klaus Kleinfeld expressed his pleasure at the results, noting that the quarter "is a clear data point that Alcoa's transformation is delivering." Moreover, Kleinfeld emphasized the importance of the restructuring moves the company has made, arguing that "[t]his strong quarter is the direct result of our intense focus on repositioning our portfolio."

What Alcoa sees ahead

Source: Alcoa.

Of great importance not just to Alcoa but to investors more broadly is the company's look at the future of the industries on which it depends. Alcoa said that it expects global aerospace sales growth of 8% to 9%, with commercial aircraft and regional jet sales playing a vital role. Automotive production growth this year will be less important at 2% to 4%, and declines in industrial gas turbine sales will weigh on the industry overall. Yet the commercial transportation market looks like the biggest growth opportunity for Alcoa right now, with expectations of 16% to 20% production growth for 2014. More broadly, Alcoa repeated its belief that global aluminum demand overall will grow by 7% this year.

Alcoa also expects its internal moves to improve its prospects. The company has gradually cut back on its higher-cost smelter operations, instead looking for lower-cost ways to produce the commodity materials necessary to increase its margins. The company's Saudi Arabia joint venture has produced a fully operational smelter, and Alcoa expects the facility's refinery to have the lowest costs of any such operation in the world.

How can Alcoa make its future brighter?

Alcoa finds itself at a potential turning point, as some major initiatives from large customers will test the viability of aluminum-made products in a wider variety of applications. Most notably, the release of the aluminum-body 2015 Ford F-150 continues to represent a huge opportunity for Alcoa, but it also carries a lot of risk if Ford customers don't buy in to the concept behind the lighter-weight, more fuel-efficient truck.

Source: Alcoa.

Similarly, with its pending purchase of Firth Rixson, Alcoa will redouble its commitment to the aerospace industry. Alcoa said that the acquisition is moving forward, and it still hopes to close on the deal by the end of 2014. Given the huge market for commercial aircraft as well as the need for highly specialized value-add products to meet the technologically advanced demands that aircraft makers have on their suppliers, Alcoa looks well poised to keep its revenue and profits moving higher, and the company said that it expects annual aerospace revenue to jump by 20% once the deal is done. The company also announced multiyear contracts with Boeing and the Pratt & Whitney division of United Technologies worth more than $2 billion. Yet if aerospace demand suddenly falls off for global macroeconomic reasons, then Alcoa's greater exposure to that key market could cause a marked reversal in the aluminum maker's fortunes.

As the broader stock market has shown some signs of weakness in recent weeks, investors are looking more closely at the fundamentals of the stocks they buy. In light of today's report, Alcoa stock quickly jumped to a gain of between 1% and 2% in the first 30 minutes after the news came out. Alcoa's core business has been stronger than ever lately, and as long as those trends continue, the stock could have room to rise further.

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