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Will Higher Commodity Prices Boost Alcoa’s 2Q16 Earnings?

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Alcoa’s 2Q16 earnings

Alcoa (AA) releases ATOI (after-tax operating income) for its different business segments. In this part of the series, we’ll look at the 2Q16 ATOI guidance Alcoa’s management has provided.

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Upstream earnings

In its Primary Metals segment, Alcoa expects the ATOI to increase by $10 million in 2Q16, excluding any impact from pricing and currency. The company expects ATOI to increase by $15 million in the Alumina segment, excluding any impact from currency and metal prices. It’s important to note that Alcoa prices 85% of its third-party alumina sales on the alumina price index (or API). API prices have risen sharply in 2Q16 as the graph above shows.

Aluminum prices have been quite strong in the quarter as discussed previously in the series. Sequentially higher commodity prices (DBC) could boost Alcoa’s 2Q16 upstream earnings.

Downstream earnings

In the GRP (Global Rolled Products) segment, Alcoa expects its 2Q16 ATOI to increase by 5%–7% on a YoY (year-over-year) basis. This estimate excludes the negative impact of $15 million, which was used to secure an alternate metal supply at the Warrick plant. The ATOI of Alcoa’s EPS (Engineered Products & Services) segment is also expected to increase 5%–10% YoY in 2Q16. However, the TCS (Transportation & Construction Solutions) segment is expected to report a flat ATOI in 2Q16.

The bulk of Alcoa’s downstream earnings come from the EPS segment, which supplies to the aerospace sector. The valuation multiples of major aircraft manufacturers like Boeing (BA) and Airbus (EADSY) have fallen in the last couple of months. However, component manufacturers like Woodward (WWD) and Barnes (B) haven’t seen a commensurate fall in their valuation multiples. You can explore this more in Will Arconic Get a Valuation Boost with Its New Structure?

Don’t forget to check with our Aluminum page for a detailed analysis of Alcoa’s 2Q16 earnings.

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