The Australian
Alcoa trains to outlast its aluminium industry competitors
Edited by : AL CIRCLE
2 min read
ALCOA is eager to dispel myths about why its quarterly reports mark the unofficial start of earnings season.
No, it has nothing to do with its alphabetical order in the Dow Jones industrials - its ticker symbol is "AA" - or even its status as an economic bellwether.
Alcoa's habit of publishing financial statements faster than any other major company began under chief executive Paul O'Neill, who later became Treasury secretary, as a way to show off its management prowess and financial controls.
Today’s report, in which Alcoa is expected to report first-quarter earnings of US2c a share, down from 27c a year earlier, will show the limits of even the most ruthlessly efficient organisation in the face of a challenging economy.
Think of the aluminium industry as a big treadmill with all of its participants running as fast as they can just to stay even with or, with great exertion, pull ahead of flabbier competitors.
Rec Coverage 28 Day pass
Alcoa says it is getting leaner, aiming to get from the 30th to the 23rd percentile in production costs for its alumina refining business and from 50th to 40th for energy-intensive smelting by 2015.
Alcoa just announced it is closing 4 per cent of its refining capacity months after idling less-efficient smelters.
Slowpokes normally tumble off the end of the treadmill. But even though about a third of China's smelters are unprofitable, according to Alcoa, more are being built.
With about 40 per cent of primary aluminium and alumina capacity and 45 per cent of global demand, China seeks self-sufficiency.
So what should be a decent business environment for Alcoa - with strong demand from automotive, aerospace and packaging customers helping offset weakness in construction - has become challenging.
Its shares have underperformed the S&P 500 by 50 per cent in the past year, and fewer than half of equity analysts have a "buy" recommendation.
Alcoa now sports the same trailing earnings multiple as the S&P 500 despite aluminium demand rising at about double the global economy's pace. That leaves much bad news priced in.
Any management guidance that cost discipline is working should outweigh a weak first quarter.
But in getting fit for a time when industry conditions are more favourable, Alcoa is training for a marathon, not a sprint.
No, it has nothing to do with its alphabetical order in the Dow Jones industrials - its ticker symbol is "AA" - or even its status as an economic bellwether.
Alcoa's habit of publishing financial statements faster than any other major company began under chief executive Paul O'Neill, who later became Treasury secretary, as a way to show off its management prowess and financial controls.
Today’s report, in which Alcoa is expected to report first-quarter earnings of US2c a share, down from 27c a year earlier, will show the limits of even the most ruthlessly efficient organisation in the face of a challenging economy.
Think of the aluminium industry as a big treadmill with all of its participants running as fast as they can just to stay even with or, with great exertion, pull ahead of flabbier competitors.
Rec Coverage 28 Day pass
Alcoa says it is getting leaner, aiming to get from the 30th to the 23rd percentile in production costs for its alumina refining business and from 50th to 40th for energy-intensive smelting by 2015.
Alcoa just announced it is closing 4 per cent of its refining capacity months after idling less-efficient smelters.
Slowpokes normally tumble off the end of the treadmill. But even though about a third of China's smelters are unprofitable, according to Alcoa, more are being built.
With about 40 per cent of primary aluminium and alumina capacity and 45 per cent of global demand, China seeks self-sufficiency.
So what should be a decent business environment for Alcoa - with strong demand from automotive, aerospace and packaging customers helping offset weakness in construction - has become challenging.
Its shares have underperformed the S&P 500 by 50 per cent in the past year, and fewer than half of equity analysts have a "buy" recommendation.
Alcoa now sports the same trailing earnings multiple as the S&P 500 despite aluminium demand rising at about double the global economy's pace. That leaves much bad news priced in.
Any management guidance that cost discipline is working should outweigh a weak first quarter.
But in getting fit for a time when industry conditions are more favourable, Alcoa is training for a marathon, not a sprint.
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