An Alcoa aluminum plant in Alcoa, Tennessee is seen in this April 8, 2014 file photograph.© Wade Payne / Reuters
Alcoa Corp.'s first full quarter as a standalone company vindicates investors' faith and signals even better times may be ahead.
Profit excluding one-time items was 63 cents a share, New York-based Alcoa reported after the close of regular trading Monday, exceeding all seven estimates of analysts tracked by Bloomberg. Shares jumped as much as 7.1 per cent on Tuesday.
Shares have surged since the company separated from its jet– and car-parts business in November, helped by a jump in aluminum prices. Investors have also rewarded Alcoa for its thrift, as Chief Executive Officer Roy Harvey merges units and drives efforts to simplify operations. The results come as Arconic Inc., the downstream business that split from Alcoa, contends with a proxy battle fueled in part by concern over corporate spending.
"They're going to be very aggressive on cost-cutting," Lloyd O'Carroll, an independent analyst in Richmond, Virginia, said in a telephone interview. Alcoa "can move a lot faster since the split," he said. "Now this is their gig and they've got the bit in the teeth."
Since Nov. 1, when Alcoa started trading separately, shares have gained more than 50 per cent.
For 2017, Alcoa is projecting global aluminum demand growth of 4.5 to 5 per cent over 2016, higher than it forecast in January. The company continues to see relatively balanced global bauxite and alumina markets and a global aluminum surplus of 300,000 to 700,000 metric tons.
Alcoa reiterated its 2017 adjusted Ebitda forecast of $2.1-billion to $2.3-billion.
Aluminum prices have gained about 15 per cent this year, the best performance of the main metals traded in London.
"Aluminum prices certainly escalated nicely, so that should lead to some very nice numbers," O'Carroll said.
Arconic's Battle
Arconic is involved in a proxy battle with activist investor Elliott Management Corp. that led to the departure of Klaus Kleinfeld as CEO and chairman. Among Elliott's complaints were Arconic's corporate overhead expenses and Kleinfeld's globe-trotting lifestyle.
Kleinfeld was ousted April 17 after a rogue response to Elliott, the New York hedge fund controlled by billionaire Paul Singer. Following weeks of hostilities, he fired off a letter to Elliott that the fund described as threatening. Kleinfeld agreed to leave his post after Arconic's directors said he showed "poor judgment."
Aluminum producers including Alcoa, Aluminum Corp. of China Ltd. and Norsk Hydro ASA are set to rally if China delivers on plans to fight pollution and eliminate excess capacity, according to Morgan Stanley. That's yet to be priced in to the shares of producers, which have an average upside potential of 23 per cent, analysts including Menno Sanderse and Alain Gabriel wrote in a note dated Thursday.
Demand Growth
Alcoa is "cautiously optimistic" on the outlook for capacity to come off line in China, Harvey said in an interview after earnings were released. "But we need to see action in place of rhetoric."
The company is seeing demand growth in the transport and construction sectors in the Asian nation, he said, and "strength in the U.S. and Europe is driven by actual underlying data, not just rumors about where the market can go."
He also said that they haven't included the Trump infrastructure plan in their fundamental market forecasts.