Why Alcoa reported strong third quarter results

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Alcoa reports strong third quarter results

Alcoa (AA) reported its third quarter results on October 8. The results were better than the average street expectations. The diluted earnings per share (or EPS), before extraordinary items, almost tripled compared to 3Q13. It’s important to note that EPS is a key financial metric for investors.

In this part of the series, we’ll analyze the results in more detail. We’ll start with the third quarter revenues.

summary financials

Alcoa revenues increase in the third quarter

The previous chart shows a summary of Alcoa’s third quarter results. Alcoa’s third quarter revenues increased 8.2%—compared to 3Q13. For aluminum companies, the total revenue equals the average selling prices multiplied by the total shipments.

Interestingly, Alcoa’s average aluminum price increased 16%—compared to 3Q13. The aluminum shipments decreased from 2013. The increased revenues are a result of the increase in aluminum prices and regional premiums.

It’s important to note that regional premiums are an extra cost that aluminum buyers have to pay for taking the physical delivery of aluminum. This is paid in addition to the prevailing aluminum prices on the London Metal Exchange (or LME).

Aluminum buyers have been complaining about these premiums. The premiums have been increasing despite an excess aluminum supply. You can learn more about the aluminum pricing mechanism here.

Alcoa is closer to its transformation

Alcoa’s third quarter results reflect another step in its transformation. In the next part of the series, we’ll look at the transformation in more detail.

Investors can also play the aluminum sector through other companies like Rio Tinto (or RIO), Century Aluminum (CENX), Kaiser Aluminum (KALU), and Constellium (CSTM). An alternate way to gain access to the metals industry is through the SPDR S&P Metals and Mining ETF (XME)

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