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Alcoa (AA) Misses Q3 Earnings, Sales Estimates; Shares Tank

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Alcoa (AA - Free Report) saw higher profits on a reported basis in third-quarter 2016 on gains from its aggressive productivity actions, but its adjusted earnings and sales fell short of expectations.

The New York-based company logged profits, as reported, of $166 million (or 33 cents per share) for the reported quarter, a nearly four-fold rise from $44 million or 6 cents per share in the year-ago quarter. Productivity gains continued to offset headwinds from lower metal prices. The company recorded productivity gains of $246 million (post-tax) across all segments in the quarter.

Barring one-time items, earnings came in at 32 cents per share, up from 21 cents per share a year ago. The results, however, missed the Zacks Consensus Estimate of 34 cents.

Revenues went down roughly 6% year over year to $5,213 million in the third quarter, hurt by lower prices of alumina, unfavorable price and product mix and curtailment & closure of businesses. Revenues trailed the Zacks Consensus Estimate of $5,334 million.

Alcoa backed its global aluminum demand growth forecast for 2016. The company’s shares skid around 11% in early trading on Tuesday, reflecting the disappointing third-quarter results.

Segment Review

Global Rolled Products  (GRP) – Sales edged down around 0.4% year over year to $1.5 billion. After-tax operating income (ATOI) slipped around 6% year over year to $58 million, impacted by transformation of the Warrick rolling mill.  Productivity gains and higher volumes in automotive were offset by higher costs, unfavorable product mix and pricing pressure in global can sheet packaging.

Engineered Products and Solutions (EPS) – Revenues from the division edged up 0.6% year over year to roughly $1.4 billion in the third quarter on the back of the RTI acquisition. ATOI rose around 7% year over year to $162 million on contributions from RTI acquisition and productivity gains, partly offset by unfavorable pricing and mix, higher costs and investments in growth projects.   

Transportation and Construction Solutions (TCS) – The segment’s sales fell roughly 5% year over year to $450 million. ATOI rose around 7% year over year to $47 million on productivity gains.

Alumina – Revenues slid around 25% year over year to $687 million in the quarter. Production fell around 16% year over year to 3.3 million metric tons. Shipments also went down roughly 16% to 2.4 million metric tons. ATOI tumbled roughly 66% year over year to $72 million, hurt by lower alumina pricing and currency headwinds.

Primary Metals – Sales slipped around 8% year over year to $1.1 billion. Shipments fell around 9% to 0.6 million metric tons. Production was roughly 0.6 million metric tons, an around 16% decline from the prior-year quarter. ATOI was $56 million for the reported quarter, compared with a loss of $59 million a year ago.
 
Financial Position

Alcoa ended the quarter with cash and cash equivalents of $1,863 million, up around 7% year over year. Long-term debt was $9,501 million, up roughly 4% year over year. Cash from operations was $306 million in the reported quarter while free cash flow was $31 million.

Business Separation & Strategic Actions

Alcoa is on track to complete the separation of its smelting and refining business from those that cater to aerospace and automotive markets. The separation will result in the creation of two standalone entities – Arconic Inc. and Alcoa Corporation.

Alcoa’s board recently approved the completion of the planned separation. The proposed split has been scheduled to become effective before the opening of the market on Nov 1, 2016.

The separation will provide shareholders with value-creating investment opportunities. It will also mark the completion of Alcoa’s multi-year transformation. Alcoa, on Oct 5, completed its earlier announced 1-for-3 reverse stock split in preparation for its planned separation. Its shares started trading on a split-adjusted basis on Oct 6.

Alcoa also remains on track to move down the cost curve through capacity curtailments and its aluminum and alumina businesses have met or surpassed their respective global cost curve goals for this year.  

The company is also divesting non-core businesses to optimize portfolio and strengthen its balance sheet. Alcoa, during the reported quarter, completed the sale of the Intalco smelter wharf and other excess property in Washington State for $120 million. The company expects other potential asset sales of roughly $250 million in the fourth quarter. Gross proceeds from asset sales are expected to total around $1.2 billion in 2016.

Outlook

For aerospace, Alcoa expects strong market fundamentals to drive long-term demand. The company sees aircraft deliveries to be flat to up 3% for full-year 2016.

The company continues to see global automotive production growth of 1% to 4% for 2016. This includes 1% to 2% growth in North America.

For the commercial transportation market, the company now expects global production to be flat to up 2% in 2016 (an improvement from the earlier view of -4% to -1%). Production growth in the heavy duty truck, trailer and bus market in Europe and China is expected to be mostly offset by continued declines in North America.   

Alcoa continues to expect 4% to 6% growth in the global building and construction market for 2016. For the packaging market, Alcoa now expects growth of 2% to 3% in 2016, an improvement from its earlier forecast of 1% to 3%. For the global airfoil market, Alcoa continues to sees 2% to 4% growth in 2016.

Moreover, Alcoa expects a global aluminum deficit of 615,000 metric tons and a global alumina deficit of 1.6 million metric tons for 2016. The company reaffirmed its global aluminum demand growth forecast of 5% for 2016. Global demand for aluminum is expected to grow faster than supply in 2016.

Alcoa has also revised its outlook for GRP, EPS and TCS units (all part of Arconic) to reflect near-term industry challenges and currency impacts. For GRP, the company now expects revenues of $4.8 billion to $5 billion for 2016, down from $5 billion to $5.2 billion it expected earlier.

For EPS, the company expects sales of $5.6 billion to $5.8 billion for 2016, down from its earlier view of $5.9 billion to $6.1 billion. Alcoa also sees revenues from the TCS unit in the band of $1.7 billion to $1.8 billion, down from the prior view of $2.1 billion.

Alcoa currently carries a Zacks Rank #2 (Buy).

ALCOA INC Price, Consensus and EPS Surprise

ALCOA INC Price, Consensus and EPS Surprise | ALCOA INC Quote

Stocks to Consider

Other well-ranked companies in the mining space include Teck Resources Ltd. (TCK - Free Report) , Newmont Mining Corp. (NEM - Free Report) and Cliffs Natural Resources Inc. (CLF - Free Report) .

Teck Resources sports a Zacks Rank #1 (Strong Buy). The company has an expected earnings growth of around 145% for the current year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Newmont, which carries a Zacks Rank #2, has an expected earnings growth of 89.5% for the current year.

Cliffs, currently holding a Zacks Rank #2, has an expected earnings growth of roughly 236.6% for the current year.

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