Will Alcoa (AA) Surprise This Earnings Season? - Analyst Blog


Aluminum giant Alcoa ( AA ) is set to release its second-quarter 2014 results after the close on Jul 8.  In the last quarter, the New York-based company delivered an 80% positive earnings surprise.

While many may think that Alcoa is no longer a major earnings season bellwether following its exclusion from the Dow Jones Industrial Average last year, its results will put a spotlight on demand trends for aluminum across a bevy of industries, which is closely linked to levels of economic activity.

Alcoa is also expected to provide some color on demand for aluminum across end-markets, especially aerospace, in its second-quarter commentary. Let's see how things are shaping up for this announcement.

Factors to Consider This Quarter

Alcoa's results should be driven by strength across aerospace and auto markets where demand for aluminum remains healthy. It is seeing healthy airline fundamentals. Alcoa, in Apr 2014, raised its growth expectations for the aerospace market to 8%-9% from 7%-8% for 2014 factoring in strong demand for both large commercial aircraft and regional jets and sustained growth in the business jet market.

Alcoa last month made another big push into the aerospace market as it agreed to buy U.K.-based leading jet engine components maker Firth Rixson for $2.85 billion. The acquisition reinforces the company's aerospace business and strongly places it to capture additional growth in this fast-growing market through a broad spectrum of high-growth, value-add jet engine components.

Moreover, Alcoa's aggressive cost-cutting and productivity improvement actions should support earnings in the second quarter. The company is making capital investments and remains on track to move down the cost curve and curtail capacities in its upstream business (through closer of smelters).

However, Alcoa is expected to face sustained pricing pressure and higher energy costs in the quarter. Realized aluminum prices fell 8% year over year in the first quarter, hurting the company's sales in the process. Aluminum prices remain weak given its oversupply in the market.

Moreover, Alcoa is expected to see continued softness in non-residential construction and commercial transportation markets in Europe. Demand from the industrial gas turbine market and U.S. defense spare parts are also expected to be sluggish in the second quarter.

Earnings Whispers

Our proven model does not conclusively show that Alcoa is likely to beat the Zacks Consensus Estimate in the second quarter. That is because a stock needs to have both a positive Earnings ESP (Expected Surprise Prediction) and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Zacks ESP: ESP for Alcoa is 0.00%. This is because both the Most Accurate Estimate and the Zacks Consensus Estimate are pegged at 13 cents.

Zacks Rank #2 (Buy): Alcoa's Zacks Rank #2 when combined with an ESP of 0.00% makes surprise prediction difficult. We caution against stocks with Zacks Ranks #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other mining companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Newmont Mining Corp. ( NEM ) has earnings ESP of +5.26% and carries a Zacks Rank #3 (Hold).

Southern Copper Corp. ( SCCO ) has earnings ESP of +4.55% and carries a Zacks Rank #3 (Hold).

Franco-Nevada Corp. ( FNV ) has earnings ESP of +4.55% and carries a Zacks Rank #3 (Hold).

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ALCOA INC (AA): Free Stock Analysis Report

FRANCO NV CP (FNV): Free Stock Analysis Report

NEWMONT MINING (NEM): Free Stock Analysis Report

SOUTHERN COPPER (SCCO): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: AA , FNV , NEM , SCCO



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