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Why a European Recovery Should Affect Alcoa’s 1Q Earnings

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European recovery

Europe is the second-biggest market for Alcoa (AA), contributing almost one-quarter of the company’s revenues. The European economy has been weak for the last couple of years. This weakness has negatively affected Alcoa’s European operations. However, there has been a slight turnaround in the European economy. In this part of the series, we’ll discuss how the European recovery should affect Alcoa’s 1Q 2015 earnings.

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The iShares MSCI EAFE ETF (EFA) seeks to invest in developed market equities excluding North America. It has invested in several major European companies. It’s an alternate way to play European stocks. Constellium (CSTM) is a leading aluminum fabricator in Europe. Century Aluminum (CENX) also has smelting plants in Europe. It currently forms 2.5% of the SPDR S&P Metals and Mining ETF (XME). Kaiser Aluminum (KALU) and Reliance Steel & Aluminum (RS) respectively form 4.2%, and 4% of XME.

Manufacturing PMI

The chart above shows the manufacturing PMI in Europe. Readings above 50 generally indicate economic expansion, while a reading below 50 indicates a contraction. PMI in Europe was 51 in February. Manufacturing PMI in Europe has held above 50 for several months.

Passenger car registration in the European Union increased by 6.7% in January. Higher vehicle sales in Europe should boost Alcoa’s shipments in Europe.

Aluminum premiums

While Alcoa’s shipments in Europe might positively surprise in 1Q, analysts expect market factors to negatively affect the company’s earnings. Several market factors affect Alcoa, like volatility in aluminum prices and physical aluminum premiums. Alcoa is also exposed to currency movements, as its operations are spread across several regions.

An increase in aluminum prices was a key driver of Alcoa’s performance in 2014. But how are aluminum prices expected to affect Alcoa’s 1Q earnings? Find out in our next part of the series.

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