Bear of the Day: Alcoa Corporation (AA)

Alcoa Corporation (AA) stock has fallen over 25% in 2019 as the broader global economic slowdown hampers demand for aluminum and drags prices down. The company’s near-term outlook appears rough and the recent U.S.-China trade war setback hardly helps Alcoa’s situation.

What’s Going On?

Alcoa’s story is not that hard to understand. The global aluminum powerhouse has suffered from the broader global economic slowdown in 2019. The Pittsburgh-based manufacturer posted worse-than-expected quarterly earnings results in mid-October. AA posted an adjusted Q3 loss of -$0.44 per share, down from +$0.82 in the year-ago period and far below Q2’s loss of -$0.01 per share.

Meanwhile, revenue fell from $3.39 billion to $2.56 billion. More illuminating of the current and future conditions, Alcoa’s management said it may close facilities over the next several years and plans to sell up to $1 billion in assets.

Last quarter, Alcoa forecasted that global aluminum demand won’t come in above 0.4% in 2019, and could fall by as much as 0.6%. This came in far worse than its previous aluminum growth outlook for between 1.3% and 2.3%. “The change is driven by weakening macroeconomic conditions, trade tensions between the U.S. and China, and contracting manufacturing activity, especially in the global automotive sector,” the firm said in a statement.

The global economic picture hasn’t gotten better since Alcoa provided its rough guidance. In fact, the Institute for Supply Management’s manufacturing index decreased to 48.1 in November.

This came in below economists’ expectations and marked the fourth straight contraction-level reading of below 50. And President Trump on Tuesday seemed to reverse course on the recent U.S.-China war progress that pushed stocks to new highs in November.

 

 

 

 

Q4 Outlook & Beyond

Alcoa’s fourth quarter sales are projected to fall 25% from the prior-year quarter to $2.51 billion, based on our current Zacks Consensus Estimates. This would roughly match Q3’s decline.

Overall, the firm’s full-year fiscal 2019 revenue is projected to fall nearly 22% against 2018. On the positive side, AA’s first quarter fiscal 2020 sales are only expected to slip 5.7% and fiscal 2020 sales are expected to come in roughly flat compared to our current-year estimate.

At the bottom end of the income statement, Alcoa’s adjusted Q4 earnings are projected to tumble from +$0.66 a share to -$0.22. The aluminum manufacturer’s fiscal 2019 EPS figure is projected to fall from +$3.58 to -$0.83.

Peeking ahead, the company’s adjusted full-year fiscal 2020 earnings are then expected to move heavily in the right direction and come in at +$0.67 per share.

 

 

 

 

Bottom Line

The chart above helps investors see just how much worse Alcoa’s earnings outlook has turned since it reported its Q3 results. This helps the firm hold a Zacks Rank #5 (Strong Sell) at the moment. The company also sports a “C” grade for Value in our Styles scores system.

Some investors may try to scoop up beaten-down AA stock, but it could still have far more room to fall given the current conditions. Plus, Alcoa’s Metal Products – Distribution industry currently sits in the bottom 7% of our more than 250 Zacks industries.

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