Alcoa: Strong Q4 Numbers Can’t Hide Its Weakness




Alcoa (AA), the leading US-based aluminum producer (XME), released its fourth-quarter earnings on January 16 after the markets closed. The company reported revenues of $3.3 billion during the fourth quarter—in line with the estimates. However, Alcoa managed to beat the bottom-line estimates. The company’s adjusted EPS was $0.66 in the fourth quarter, while the adjusted EBITDA was $749 million.

While Alcoa’s fourth-quarter earnings were better than expected, the stock fell in after-hours trading on January 16. Generally, you would expect the markets to react favorably to the earnings beat. So, what really spooked investors?

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Weakness ahead

As we noted in Alcoa’s pre-earnings analysis, 2018 was a strong year for the company due to higher alumina prices. However, Alcoa will likely miss the alumina windfall this year. Alcoa expects a surplus in alumina markets in 2019. Century Aluminum (CENX), which buys alumina from outside parties, could benefit from lower alumina prices (AWC) (RIO).

Alcoa didn’t provide its 2019 EBITDA guidance during the fourth-quarter earnings release. With aluminum prices below $1,850 per metric ton and the API (Alumina Price Index) hovering near $400 per metric ton, Alcoa’s 2019 guidance would have been lower compared to what it posted last year and probably much lower than analysts’ forecast. In aluminum markets, Alcoa expects global demand to increase 3%–4% this year, which could be the slowest growth rate in a decade.

While Alcoa managed to post strong earnings last year, its earnings look vulnerable in 2019. Read Alcoa: 2019 Might be the Real Test for more analysis.


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