Alcoa Is At The Heart Of Global Supply Chain Issues
Results from Alcoa (NYSE: AA) prove that early business cycle companies such as itself are perfectly positioned for today's global supply chain issues. The issues stem from record demand that has backlogs for many businesses at record highs and inventories at record lows. What this means for materials companies like Alcoa is robust demand across all end markets and demand that we don't see subsiding until late in 2022 at the earliest. Even then, demand will still remain high but at a more sustainable pace. Between then and now, shares of Alcoa are already making big moves, and even bigger moves are still to come.
Alcoa Blows Past The Consensus Estimate
Alcoa had a fantastic third quarter and, like others we've seen, the business could have been better if not for systemic issues such as railcar capacity. regardless, the $3.11 billion in consolidated revenue is up 10% sequentially on the combination of demand and pricing and 31.2% versus last year. Revenue also beat the consensus by 650 basis points and is up more than 20% versus 2019. In terms of production and shipments, production remained consistent with the previous quarter's high levels while shipments declined 6%. The 6% decline in shipments is due to divestiture and offset by a robust pricing environment.
“The strategic work we’ve been implementing across our Company has helped us effectively capture the benefits from very strong market fundamentals and deliver another excellent quarter with record profitability,” said Alcoa President and CEO Roy Harvey.
Moving down to the earnings, the company reported a significant widening of margins due to the favorable pricing environment and internal efforts to control costs. Net income attributable to shareholders reached a quarterly record because of it and resulted in $1.76 in GAAP earnings. The GAAP earnings beat the consensus by $0.08 while the adjusted $2.05 beat by a quarter. The GAAP earnings also reverse a loss posted in the previous year.
Turning to the guidance, the company declined to give specific guidance for revenue or earnings but did give a favorable outlook for market fundamentals. The company also says it's restarting one of its plants in South America to help meet demand and that will drive additional revenue and earnings gains.
“Alcoa continues to expect a strong 2021 based on the continued economic recovery and increased demand for aluminum in all end markets. The Company’s Aluminum segment is forecasting double-digit growth on year-over-year shipment volume of value-added products, and the Company expects annual global demand for primary aluminum to increase approximately 10 percent relative to 2020 and to surpass the pre-pandemic levels in 2019.”
Capital Returns Help Drive Alcoa Higher
Alcoa didn't just have a good quarter it had a great quarter in which cash flows were vastly improved. The company was able to use $500 million to pay down some debt bringing its net debt to under $350 million and its weighted relative debt to below the company's threshold target. These moves were the precursor to a newly announced buy-back program and dividend that are worth $500 million to investors and about 0.7% in yield. The $500 million by back is worth about 4.75% of the market cap.
The Technical Outlook: Alcoa Goes Ballistic
Shares of Alcoa surged in the wake of the Q3 earnings report and capital return program. Shares of the stock are now trading at a multi-year high and gaining momentum as price action approaches its next resistance level. Resistance is likely In the range of $58 but we would expect it to fall quickly based on the results and outlook. A move above $58 would be very bullish and put the stock on track to post its highest trading price since 2009. The analysts are already getting excited and have pushed the Pricetarget.com consensus rating higher. In our view, this stock is heading back up to its previous highs near the $100 level which is good for a gain of about 90%.
Companies in This Article:
