Alcoa Reports Spectacular Numbers In The First Quarter Of FY2015

The world’s top aluminum producing company, Alcoa (AA, Financial), reported its first quarter earnings of fiscal year 2015 on April 8, and the earnings beat the Street estimates though its revenue slightly missed to meet the estimates. In fact, the diversification process and reorientation endeavors of Alcoa’s management aided in driving earnings upwards from that reported in the year ago quarter. The company has cast a positive outlook from the quarterly performance and this is testified through the comment given by CEO, Klaus Kleinfeld, during the earnings call – “When you lift the hood on the profit side, you see a record performance on the upstream side… Again super, super good first quarter. And you see a very, very good performance on the downstream side.”

Let’s quickly take a peek into the quarterly report to find out the reasons for such a stupendous growth of Alcoa in its first quarter.

The quarter recap

Revenue for the quarter rose 6.7% year-over-year to $5.82 billion. In fact, the aerospace and automotive divisions of the company witnessed improvement in revenue during the first quarter and the smelting division also benefitted from the favorable exchange rates. However, the top line missed the Street estimates of $5.94 billion for the first quarter.

Amid the transformational push, the company was able to report earnings of $0.28 a share, surpassing analysts’ estimates by $0.02 a share. The company’s net income rose from a loss of $178 million reported in the same quarter last year, to a profit of $195 million during this first quarter.

The company’s continued efforts to diversify its downstream operations through investments in aerospace business have helped in earning profits, while it’s on the move of reducing its upstream assets.

During the earnings call, Alcoa’s CEO commented – “First quarter results show our transformation is moving at ongoing high speed and is fully on course… We are organically and inorganically broadening our innovative, multi-material value-add businesses, bringing new capabilities and materials to our aerospace and automotive offerings, and taking swift action in the upstream, making it more competitive…”

The turnaround in the smelting division proved highly effective in pulling up earnings for the first quarter, as the division posted earnings of $187 million, compared to the $15 million loss reported a year ago. Alcoa attributes such a spectacular earnings growth in the first quarter to “favorable foreign currency exchange rates, lower energy costs in Spain and productivity improvements” which served as tailwinds for growing the smelting business. As Alcoa sells aluminium in dollars, but makes most of it outside the U.S., it gets the benefits of low cost of production plus the positive impact of depreciation of foreign currencies.

However, the global rolled products division, which manufactures sheets for the automotive and beverage industries saw a 42% reduction in earnings, year-over-year, to $34 million. This was majorly due to oversupply in packaging, research and developmental costs of a new method for making rolling aluminium named “Micromill” and the impact of the ramp-up costs for a rolling mill in Saudi Arabia.

The major businesses that are seeing fast expansion are the aerospace division which makes parts for aeroplanes and the automotive division. The aerospace division reported an earnings improvement of 1% year-over-year to $191 million.

The future outlook remains highly positive

To expand further in the aerospace division, the company announced the acquisition of titanium supplier, RTI International, last month. This announcement came just after the projections were provided in January this year where the company exhibited its optimism on the growth in the aerospace business division. In January, the company projected to see “another strong year” of 9%-10% aerospace sales growth.

During the earnings call, Alcoa reiterated its year-long growth projections and stated that it would come from most of the key sectors it’s expanding into, at this juncture. It estimates that the global auto production would increase 2%-4% for the year while sales growth in the commercial building and construction market is estimated to be around 5%-7% on an annual basis. Also, the aluminium market is now projected to be in a 326,000 ton surplus in 2015, largely driven by increase in output estimates in top-producing China.

Last word

While expanding its multi-material operations, the company is adopting the correct strategies to grow organically in its automotive and aerospace divisions that are presently in the expansion mode. Investors are happy with the posted results and the upcoming quarters will have more to say with respect to the growing sales and profits of Alcoa in the days to come. Presently, of 22 analysts covering Alcoa stock, 14 rate it as ‘Buy’, 7 recommend a ‘hold’ and 1 rates it as ‘sell’. Analysts are also getting more optimistic on the stock performance in the upcoming days, so let’s wait and watch.