Image Source: aushiker
First-quarter earnings season is already upon us, with aluminum giant Alcoa (AA) kicking things off April 8. If there is one thing investors should know about Alcoa, buying the company’s equity nearly 7 years into an economic recovery is fraught with capital risk. No matter how much Alcoa’s business shifts to value-add from commodity-type metal, core demand will always be cyclical.
There were a lot of good numbers in the Alcoa report. Revenue grew 7% thanks to organic expansion in automotive and aerospace, while net income came in at $0.28 per share. After-tax operating income of $191 million was a record for its ‘Engineered Products and Solutions’ division, while the same measure in its ‘Alumina’ segment doubled year-over-year.
But we were expecting strong performance from the firm at this point in the economic cycle.
Once metals demand slows, metal prices will come under pressure as they have in every other cycle to this point. With global aluminum demand to increase 6.5% in 2015, to a record 57.5 million metric tons, investors can probably expect decent fundamental performance at the aluminum giant this year. We also like the firm’s deal to scoop up Firth Rixson, which enhances its exposure to burgeoning jet engine demand.
But look for Alcoa’s equity to begin to sell off 6-9 months in advance of expectations for a flattening of aluminum demand growth, whenever this happens. Shares are already reflecting the good times, and we see no reason to own the company at the moment. From our perspective, Alcoa is only worth considering near the trough of the economic cycle, but even then, we can think off hundreds of other businesses with better revenue models.
If you’re looking for the best metal-bender, we think Precision Castparts (PCP) is the one. Five years from now, we wouldn’t be surprised to see both Alcoa and Precision look to tie the knot, though we’re not sure such a deal would get a thumbs-up from the DOJ. Alcoa’s acquisitions of Firth Rixson and titanium leaders TITAL and RTI International make it a very attractive candidate for Precision’s management team, which we think is the best in the business at cost take-outs.