Why Alcoa Corp's Fourth-Quarter Loss Isn't As Bad As it Appears

Alcoa Corp's (NYSE: AA) fourth-quarter GAAP earnings came in at a loss of $0.68 a share. It was the aluminum giant's first quarter as a stand-alone company, so it was a rather inauspicious performance. But don't get caught up in the headline number; a little analysis is needed to understand the big picture that's behind the loss and why it was good to get the pain out of the way.

A list of Alcoa's closed and curtailed facilities since 2008

Alcoa's closed and curtailed capacity. Image source: Alcoa Corp.

The aluminum company's fourth-quarter net loss of $125 million included "special items" worth $151 million. Those costs were "primarily related to the permanent closure of Suralco's refinery and mines in Suriname and the impairment of Alcoa of Australia Limited's (AofA) interests in a Western Australia (WA) gas field." Pull those one-time expenses out, and Alcoa would have earned $0.14 a share.

That adjusted number was still below analyst expectations of $0.20 a share. But you have to look at what the one-time items mean for the future. Writing down the value of the gas assets was not good news, but at least it's out of the way. The permanent closure of the Suriname assets, however, helps set the stage for a brighter future. For around a decade Alcoa has been closing older and less desirable facilities, effectively updating its business to better compete in today's market.

The impact has been pretty huge. The company's streamlining efforts since 2010 improved its position on the alumina cost curve from the 30th percentile to the 17th percentile. In aluminum, closures and curtailments helped push it from the 51st percentile to the 38th. The company has made a lot of progress to get where it is today as a stand-alone company, and the fourth-quarter closures were just a continuation of the longer-term moves to improve the business.

There's a cost associated with these efforts, however, and the fourth quarter clearly demonstrated that. But, over the longer term, such moves are setting the company up for a brighter future. In fact, you should watch for more efforts along these lines in the years ahead -- they're a sign that Alcoa is focused on getting into fighting shape.

List of Alcoa's 2017 goals, shown specifically to note the company's $50 million productivity improvement goal. Image Source: Alcoa Corp.

Alcoa's goals for 2017 include $50 million in additional net productivity savings. Image source: Alcoa Corp.

To put a different spin on the same idea, Alcoa's moves to improve its business in 2016 helped it generate $290 million in net productivity cost savings. The company's net productivity number pulls out factors beyond its control, like commodity prices and currency fluctuations. There's a lot that goes into that number, of course, but closing under-performing and less efficient assets is a key part of the puzzle over the long term. Watch the net productivity metric for continued improvement.

A positive outlook

Change is never easy, but Alcoa has made a huge amount of progress in its modernization efforts. Although the expenses related to closing assets that no longer make sense can be painful in the short term, they really are the right moves to help brighten the aluminum giant's long-term outlook. These changes started years ago, and the fruit of those efforts is showing up clearly in the company's improving cost structure. If you invest in Alcoa, look past this quarter's red ink to see the bigger picture.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

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

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

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