What to watch for in Alcoa's earnings

The company kicks off what promises to be a closely watched reporting season Tuesday.

By MSN Money Partner Jul 8, 2014 12:01PM
Credit: © Gene J. Puskar

Caption: Alcoa's aluminum Ultra One Truck Wheel on display at Alcoa's headquarters in PittsburghBy Tomi Kilgore, MarketWatch

Alcoa (AA) may no longer be a "blue chip" stock since its ouster from the Dow Jones Industrial Average ($INDU), but it is still viewed as the company that will ceremoniously kick off earnings season when it reports second-quarter results after Tuesday's close. 

The stock has been on a roll in 2014, and investors will have a good idea if that can continue after seeing how the company performed in the last three months.

Earnings: Analysts are expecting Alcoa to report earnings of 12 cents a share for the quarter ending June 30, up from earnings of 7 cents a share, excluding one-time items, reported in the same period a year ago, according to FactSet. 

That forecast has climbed steadily since the end of 2013, when analysts were projecting earnings of 8 cents a share. 

The company has beat analysts' earnings estimates in eight of the last 10 quarters. In the first quarter, Alcoa reported a net loss of 16 cents, a share, but a profit of 11 cents a share if one-time restructuring-related charges were excluded.

Revenue: Analysts are expecting revenue to decline 4.1 percent to $5.63 billion for the quarter from $5.85 billion a year ago, according to FactSet, as global supply issues have weighed on aluminum prices. 

After the company reported a 6.5 percent year-over-year decline in revenue for the first quarter, Fitch Ratings downgraded Alcoa's credit rating to "junk" status, citing concerns over the impact of weak aluminum pricing. Alcoa has topped revenue estimates in seven of the past 10 quarters.

Stock reaction : Alcoa's stock has rallied 15 percent since the end of the first quarter through Monday, and is up 39 percent so far this year, versus gains of 5.6 percent and 7 percent, respectively, for the Standard & Poor's 500 Index ($INX). 

Since Sept. 23, 2013, when the stock was booted out of the Dow Jones Industrial Average, the shares have soared 78 percent, while the Dow has advanced 11 percent over the same period. However, the stock hasn't had a great track record of rising after results. Looking back at the day after the company's last 10 quarterly reports were revealed, the stock closed lower five times, according to FactSet.

Key points: Investors will keep an eye on Alcoa's outlook for the global aerospace sector, given that the company announced last month that it acquired Firth Rixson for $2.85 billion to bolster its aerospace business. Analyst Anthony Rizzuto at Cowen & Co. believes the acquisition of Firth Rixson is part of the company's transition away from being an aluminum producer to a specialty materials company.

In early April, Alcoa increased its 2014 growth estimate for the global aerospace market to 8 percent to 9 percent, from 7 percent to 8 percent, citing strong demand for large commercial and regional jets. 

The company's outlook for global aluminum demand will also be of interest, given all the concerns over pricing. In April, Alcoa affirmed its forecast of 7 percent growth in 2014.

Rizzuto said recent conversations with clients lead him to believe fundamental-value and long-only investors have been moving into Alcoa shares, but he remains cautious on the stock until he sees further improvement in aluminum market fundamentals. He rates the stock "market perform" with a $12 price target.

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