Last week, Alcoa (AA: Charts, News) posted its fourth quarter earnings, in line with EPS expectations and exceeding revenue estimates. Alcoa, the world’s third-largest aluminum producer, reported adjusted earnings of 6 cents per share on revenue of $5.9 billion. Analysts had expected 6 cents per share on revenue of $5.58 billion. Although the company’s growth appears minimal, its adjusted fourth quarter earnings are a vast improvement over loss of 18 cents per share, or $191 million, on revenue of $5.99 billion, it posted in the prior year quarter.
Analysts are more interested in Alcoa’s outlook, which forecasts 7% demand growth in 2013, up from 6% growth in 2012. In 2012, sluggish growth in autos, construction, and packaging decreased the worldwide cost of aluminum. These sectors are all expected to pick up by next year. Alcoa is widely considered a market bellwether, since its earnings reflect the state of multiple domestic and international industries, and an accurate gauge of economic health.
Alcoa also sees strong growth potential in the aerospace industry, where aging aircraft have to be quickly replaced. During the quarter, Alcoa’s sales were boosted by a high number of aircraft-order backlogs at Boeing (BA: Charts, News) and Airbus.
Alcoa also achieved record profits in its aluminum-rolling and product-making businesses, also known as its downstream’ businesses. Its upstream’ business, which consists of its mining and refining operations, were hit by the decline in metals prices, but cost reductions helped keep them afloat. During the quarter, Alcoa cut total spending by 12% to $6.23 billion.
Alcoa’s average price received for aluminum decreased 2% from the prior year, but it increased nearly 5% from the prior quarter. The company’s shipment volume remained the same as the prior year. Due to these low aluminum prices, Credit rating company Moody’s MCO warned that it may downgrade Alcoa’s credit rating to “junk status” if it could not find new avenues of revenue growth.
Despite Moody’s warning, CEO Klaus Kleinfeld stated that the company was in a “strong position to maximize profitable growth” in 2013. Kleinfeld’s CEO, Charles D. McLane Jr., will also step down on April 1, handing the reins over to COO William F. Oplinger.
Alcoa’s critics also believe that its growth trajectory of Alcoa could be cut in half by a sudden rise in interest rates and the end of the Fed’s current round of quantitative easing. These rounds of easing are guaranteed to boost the cost of silver and gold as the U.S. dollar inevitably declines. A fresh round of debt ceiling debates will also hamper the growth of Alcoa and its dependent industries.
Shares of Alcoa trade at 10.4 times forward earnings with a PEG ratio of 1.49. The stock pays a quarterly dividend of 3 cents per share – 1.34% yield at current prices. Although the stock may look fundamentally healthy, it is down 8.8% over the past twelve months and down 72% over the past five years.
Alcoa may be a solid stock for portfolio diversification, but there are stronger metals – such as molybdenum, gold or silver, which may bounce back much faster. Investors might also benefit more from picking a stock from an industry that Alcoa provides for, such as General Motors (GM: Charts, News) or Boeing, instead of buying it directly. Last but not least, its dividend yield of 1.34% is too paltry for serious dividend investors. However, Alcoa could rally strongly on any strong macro signs that Asia or Europe are growing at a faster clip than expected, or a quick resolution to fiscal issues in the United States.
Other News About AA
Alcoa’s gains signal stronger growth ahead in Asia.
Alcoa’s earnings failed to excite its industry peers.
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