Alcoa (AA) Warms Up For Q2: Will It Beat Earnings Again?

Alcoa (NYSE:AA) is gearing up to release its second-quarter 2016 results after the close on Jul 11. In the last quarter, the New York-based aluminum giant saw its profits slump on a reported basis as lower metals prices and charges related restructuring dragged down its bottom line. However, its adjusted earnings topped expectations (a positive surprise of 250%).

Lower aluminum prices weighed on the company’s sales that fell by double digits and came below expectations. Headwinds from lower metal prices more than offset gains from productivity actions in the quarter.

Alcoa, in April, reduced its global aluminum demand growth forecast to 5% from 6% expected earlier. The company also cut its 2016 global aerospace sales growth forecast to 6%-8% from 8%-9% expected earlier. Alcoa mentioned that careful ramp-up of new program, inventory management at aerospace OEMs and declines in legacy program deliveries will affect this major end-use market. Moreover, Alcoa expects a global aluminum deficit of 1.1 million metric tons for 2016. Global demand for aluminum is expected to grow faster than supply this year.

Alcoa’s results are closely watched by investors as they shed light on demand trends for aluminum (a major industrial metal) across a large swath of industries. Investors will look particularly for management’s commentary on demand trends and outlook for key industries, especially aerospace, and the company’s planned split into two independent companies.

Let’s see how things are shaping up for this announcement.

Factors to Watch For

Alcoa’s aggressive cost-cutting and productivity improvement actions are expected to continue to lend support to its earnings in the second quarter. While aluminum pricing environment has somewhat improved of late (due to a decline in aluminum inventories), prices of the metal are still under pressure as overcapacity remains a problem.

Moreover, production is expected to fall 50,000 metric tons in the company’s Primary Metals unit in the second quarter due to the closure of Warrick Operations smelter in Indiana in March. This may put pressure on the segment’s revenues.

Alcoa is actively pursuing its aerospace expansion strategy. The company recently landed a multi-year supply contract with Brazil-based leading commercial jets maker, Embraer, worth $470 million. The deal makes Alcoa the sole supplier for proprietary wing skins and fuselage sheet to Embraer.

The company, earlier this year, also cut a long-term agreement with Boeing (NYSE:BA) to supply multi-material aerospace parts. Alcoa, last October, also inked a $1 billion deal with Airbus to supply the latter titanium, steel and nickel-based superalloy aerospace fastening systems. The deal marked Alcoa’s biggest fastener contract ever with Airbus.

Demand from the automotive market also remains healthy. While pricing remains a concern, strong shipments of automotive sheet products is expected to favorably impact the company’s global rolled products business in the June quarter.

Alcoa is also trimming uncompetitive aluminum smelting and alumina refining capacity to move down the cost curve and maintain competitiveness in a challenging operating backdrop. The completion of all announced curtailments and closures are expected to remove roughly 25% operating smelting capacity and around 20% of operating refining capacity by the middle of next year.

However, Alcoa is exposed to currency headwinds and weakness across certain end-use markets. Weakness in non-residential building and construction market is expected to persist in Europe. The company also expects a double-digit decline in the heavy duty truck and trailer market in North America in 2016. The North American packaging market also remains weak.

Alcoa remains on track to complete the separation of its smelting and refining business from those that cater to aerospace and automotive markets in second-half 2016. The separation will result in the creation of two standalone entities – ‘The Upstream Company’ and ‘The Value-Add Company’. The future Value-Add Company will be named ‘Arconic Inc.’ while the Upstream Company will be renamed ‘Alcoa Corporation’ prior to the separation

Alcoa recently filed an initial registration statement on Form 10 with the U.S. Securities and Exchange Commission (“SEC)” for the planned separation. The filing – an key milestone for the business split – includes preliminary detailed information about Alcoa Corporation as a standalone company.

The separation will provide shareholders with value-creating investment opportunities. It will also mark the completion of Alcoa’s multi-year transformation.

ALCOA INC Price and EPS Surprise

ALCOA INC Price and EPS Surprise | ALCOA INC Quote

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 and a Zacks Rank #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 9 cents.

Zacks Rank #3 (Hold): Alcoa’s Zacks Rank #3 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.

Stocks That Warrant a Look

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:

Vale S.A. (NYSE:VALE) has earnings ESP of +70% and carries a Zacks Rank #1 (Strong Buy).

Barrick Gold Corporation (NYSE:ABX) has earnings ESP of +14.29% and sports a Zacks Rank #3.