Aluminum giant Alcoa (NYSE: AA) reported second-quarter earnings results on Wednesday that were mixed. The company earned $0.19 per share on $5.9 billion of revenue. Revenue beat analyst expectations, but EPS came in below projections. Analysts expected $0.22 per share in earnings on $5.81 billion of revenue.
Alcoa’s earnings report is seen as uniquely important for a couple of reasons. First, as one of the first big companies to release quarterly results, the Alcoa earnings report is considered the unofficial start of earnings season.
Second, Alcoa is a leading company within the materials sector. Its products cater to a number of different markets, including the construction, automotive, energy and consumer electronics industries. As a result, Alcoa is seen as a bellwether for economic growth.
Overall, Alcoa grew revenue by 1% and earnings per share by 16% as compared to the second quarter of 2014.
Alcoa sees pockets of strength in certain markets, including aerospace, which is expected to grow 8%-9% in 2015. And the company is showing progress in North America, where heavy-duty truck and trailer orders are expected to grow 9%-11% this year, up from the previous forecast of 6%-8% growth.
However, other areas are looking weak. Alcoa lowered its expectations for the year in the global heavy-duty truck and trailer market. It now projects a 4%-6% decline in 2015, worse than its previous forecast for a 2%-4% decline
The reasons for this are the economic slowdowns in Brazil and China. These two nations are growing less than many companies anticipated, which poses a significant challenge since Brazil and China represent two of the premier emerging markets in the world.
In response, Alcoa is aggressively cutting costs to maintain satisfactory profitability, but more cost-cutting measures appear necessary since the company is not meeting profit expectations. One step in this direction is that Alcoa announced it will close its Pocos de Caldas smelter in Brazil, which has a capacity below 100,000 tons per year.
Alcoa’s productivity measures produced $324 million in year-over-year productivity gains and $562 million through the first half of the year. The company is targeting $900 million in total cost cuts in 2015, so it’s a good sign that it’s on track to reach its goal. These cost savings are driven by process improvements and reduced capital expenditures.
It’s been a rough year for Alcoa, to say the least. The stock has lost approximately one-third of its value just since the beginning of the year, based largely on fears of a global economic slowdown. But the good news is that shares now appear cheap.
Alcoa trades for just 9 times forward EPS estimates and 1.1 times book value. The stock also pays a dividend, which yields 1.2%.
Investors who believe the current soft patch in global economic growth is improving may want to consider Alcoa. If global growth picks up steam at all over the back half of 2015, Alcoa may see a snap-back rally.
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