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Analyst Blog

After the bell Monday, in what's widely accepted as the "unofficial kick-off" of quarterly earnings season, aluminum major Alcoa, Inc. (AA - Free Report) reported an earnings beat in its Q4. Earnings of 4 cents per share on revenues of $5.25 billion topped the 3 cents per share and $5.2 billion, respectively. This marks Alcoa's first earnings beat in the last 3 quarters.

Analysts had been lowering estimates for Alcoa's Q4 and fiscal 2016 over the past 60 days or so, helping bump down Alcoa's Zacks Rank to a #4 (Sell). But today's numbers, which reflected improved productivity numbers in the quarter as well as strong global growth projections of 6 percent for 2016 -- even in the face of consistently low prices for aluminum and related products -- has found favor among after-hours traders, with AA shares up 2 percent thus far following the earnings report.

A bigger development for down the road, however, is Alcoa's decision to split into 2 separate companies: Alcoa, which will continue to deal in the raw materials side of the business; and an as-yet unnamed company that will take over the Aerospace and Automotive side. This business would include the $9 billion in airline contract orders announced by CEO Klaus Kleinfeld. The split is expected sometime in the second half of calendar 2016.

Low aluminum prices is not a permanent issue, although at times it seems that way. As long as they continue to lag, it will make the company split appear to be an attempt to harness the "good" businesses of automotive drive trains and chassis, etc. while jettisoning off the "bad" elements -- the upstream raw materials processing, etc. But if aluminum prices find themselves on the rise, this could be a profitable venture for both companies.

Zacks style scores in Value and Momentum are both B, while its Growth score is D; these results are from prior to the earnings release, so we shall see if the scores shift in the coming days. That said, the company split would probably allow for plenty of murky waters looking forward. Our Zacks revenue estimate for the March quarter was $5.4 billion.

For more information on Alcoa's Q4 earnings, please see Zacks Director of Research Sheraz Mian's latest Earnings Report here.




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