Coverage: Alcoa earnings beat expectations

The start of quarterly earnings season usually begins with Alcoa, and Wednesday’s results could signal a strong quarter for the corporate world.

Allison Martell and Nicole Mordant wrote for Reuters that aluminum prices helped with the recovery:

Alcoa Inc (AA.N) reported a stronger-than-expected increase in third-quarter profit on Wednesday as higher aluminum prices and lower costs drove a recovery in its business unit that produces aluminum.

In an interview, Alcoa Chief Executive Klaus Kleinfeld said the “upstream” raw materials business had its best quarter since the 2008 economic slump. “Our performance this time is more great proof that our strategy is working,” he said.

The aluminum company traditionally has been one of the first S&P 500 companies to report quarterly results, and some see it as a bellwether for the broader U.S. economy because it supplies major industries such as auto and airplane manufacturing.

Bloomberg’s Sonja Elmquist said that the company was also benefiting from increased car production:

Alcoa, which is shifting its focus to manufacturing components and alloys, said it would deliver a record amount of aluminum sheet to automakers this quarter as car and truck manufacturers use more of the lightweight metal. Earnings in the company’s rolled-products segment, a supplier of aluminum sheets to car, airplane and packaging manufacturers, will more than double from a year earlier, the New York-based company said today in a slide presentation.

Alcoa is benefiting from higher commercial-jet orders and a shift to aluminum components instead of steel among automakers such as Ford Motor Co., which plans to make its F-150 pickup truck with aluminum body panels.

“Auto body sheet has a much higher margin than anything except aircraft,” Lloyd O’Carroll, a Richmond, Virginia-based Analyst at Northcoast Research Holdings LLC who recommends buying Alcoa shares, said in an interview. “I think 2015 is going to get a pretty big lift of usage on the F-150 and of course all of the margin benefit of that.”

Alcoa also forecast after-tax operating income in its engineered products division, which makes components for jets and truck wheels, will climb by 8 percent to 12 percent this quarter from a year earlier.

CNBC reported in a story by Karma Allen that investors are also happy about the company’s results, sending shares up:

The company said its downstream business, engineered products and solutions, generated $209 million in after-tax operating income, its best ever quarterly results.

Alcoa increased its 2014 estimate of production growth for the North America commercial transportation market to a range of 16 percent to 20 percent, up from a previous range of 10 percent to 14 percent in the second quarter.

The company forecast global aluminum demand growth of 7 percent in 2014.

As of Wednesday’s close, the aluminum maker’s shares had gained more than 100 percent over the past 12 months.

Alcoa unveiled the world’s largest aluminum-lithium facility earlier this month—one of three such plants in development. The warehouse, which cost $90 million, represents a big bet on the future of aviation.

Ed Crooks wrote for the Financial Times that CEO Klaus Kleinfeld was trying to make the company’s profit not so dependent on the price of metal:

For primary aluminium, after-tax income excluding restructuring and some pensions costs rose to $245m in the third quarter of 2014, up from just $8m in the equivalent period of 2013. Earnings were helped by a rise in aluminium prices, with Alcoa’s average realised selling price rising to $2,538 per tonne in the third quarter of this year from $2,180 per tonne in the third quarter of last year.

The company has also been acting to strengthen its own position, shutting down higher-cost smelting capacity and opening its low-cost Ma’aden joint venture in Saudi Arabia, which started commercial operations on September 1 and is already contributing to profits.

Klaus Kleinfeld, chief executive, said: “We want to get to where we make money independent of where the metal price is: sometimes more, sometimes less.”

John W. Miller and Tess Stynes wrote for The Wall Street Journal that his goal might not be so easy to achieve:

The price has weakened in the last six weeks, falling to below $1,900 per ton, because of a sluggish global economy and oversupply partly due to rising Chinese exports.

But the company forecast a global aluminum deficit of 671,000 metric tons in 2014, which should help prop up the price. Analysts said they were encouraged by the company keeping its forecast of an increase in global aluminum consumption of 7%. “All things considered and what we were hearing about a slowing European economy, that was the key,” said analyst Bill Selesky of Argus Research Co.

Alcoa also has been diversifying its business and has targeted commercial aerospace as a driver of future sales growth.

Its engineered products division, which makes parts for the aerospace sector, increased income to $209 million, up 9% from a year ago. It was the 18th straight quarterly improvement for that division, the company said. In June, Alcoa reached a $2.85 billion deal to acquire jet-engine parts maker Firth Rixson Ltd. In recent months, Alcoa has reached long-term deals—each valued at more than $1 billion—to supply Boeing Co. with aluminum sheet and plate products and to supply engine parts to Pratt & Whitney, a United Technologies Corp. unit.

While it’s not the most exciting industry, the aluminum market is a bellwether for many other products – particularly aircraft and automobiles. While the recovery is lagging overseas, the indicators point to a good rest of the year in manufacturing. Let the season begin.