Alcoa (AA, Financial) reported solid results for the first quarter with year-over-year growth in both revenue and profits. The Street did not cheer the results since its revenue missed analysts' consensus, but other than that, the numbers were pretty good and its initiatives for future growth seems promising. Along with this, improving macroeconomic cues indicate an increase in aluminum demand, further adding to this optimism. Starting with its numbers for the quarter, let’s see in detail what can we expect from this stock in the days to come.
A closer look
During the quarter, its revenue rose 7% from a year ago period to $5.82 billion, while earnings adjusted for special items increased to 28 cents a share compared to 9 cents last year. Its revenue surge was mainly driven by organic growth in the auto and aero sector and the largest U.S aluminum producer is counting on the same to lead its numbers in the days ahead. In fact, considering a growth of 9.6% in the large commercial aircraft segment, Alcoa anticipates its business to grow by 9% to 10% in the current fiscal. In short, we could say that the auto and aero segment are the fundamental pillars of its growth, at least in the foreseeable future.
Strong end market growth
Let’s start our analysis with the aero segment. The IATA anticipates a surge in airline profits even as passenger demand is expected to increase 7%, while cargo demand is expected to grow at 4.3% in the current fiscal. Additionally, the regional jet segment is also growing nicely, at around 11%, which is 50% above the 2012 situation. Foreseeing these developments, Alcoa invested in its recent acquisitions including Firth Rixson, RTI International Metals and TITAL.
Automotive is the second growth pillar we talked about and Alcoa is heavily counting on it to drive its top line in the coming years. The sector reported a decent growth of 5.6% year to date and the management anticipates it to swell further by 1% - 4% in the current fiscal. The seasonally adjusted annual rate (SAAR) currently stands at 17.1 million from its projection of 16.4 million made in January, which is quite encouraging and was mainly driven by solid boost in the sales of light trucks. The North American trucking industry seems poised and could be a driving factor.
Although some minor glitches could come from Europe, positives cues are coming from China where the middle income group is expected to lead a growth of 5% to 8% in the current fiscal. All in all, we could expect a decent performance from the auto industry in 2015, which will act as a tailwind for Alcoa in strengthening its business.
Conclusion
The company currently has a trailing P/E of 63.57, but its forward P/E looks impressive at 10.94, which reflects of a significant improvement in its earnings. The stock has been beaten down considerably in the past few months touching its 52-week low few days back. However, its first quarter numbers, which reported a solid year over year growth, indicates improving fundamentals and the decline could be used as a good opportunity by new entrants to bet on the stock in the long run.
