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Aluminum major Alcoa (AA) has posted a big Q1 earnings positive surprise after the bell Monday, bringing the customary start to earnings season to bear for another quarter. However, Alcoa’s 250 percent earnings beat is dampened by its Q1 revenues, which reached $4.95 billion — beneath the Zacks consensus estimate OF $5.23 billion.
Much of this discrepancy has to do with the coming split-up of Alcoa into two companies later this year: the upstream, raw materials space which will retain the Alcoa name, and the new company unveiled as Arconic, which includes the Global Rolled, Engineered Parts and Transportation & Construction businesses. The split will amount to roughly 50 percent of the current company businesses each, although the Arconic side has been showing more robust growth than the Alcoa side, having to do once again with still-low aluminum prices.
The revenue miss for the company, in fact, can be attributed to a good extent to the split-up itself. While Alcoa has been cutting its upstream businesses it has been expanding the Arconic side ahead of the separation of the two companies. In all, $364 million was cut from Alcoa’s spending in the quarter. That said, Alcoa’s current cash holdings of $1.4 billion amounts to less than analysts expected.
Ahead of the earnings report, Alcoa carried a Zacks Rank #3 (Hold), with a Value score of A but a Momentum score of F. Difficulties gauging the heavy lifting of separating the businesses has likely kept investors cautious on the shares, especially with raw aluminum prices staying low for so long. Analysts do seem to have a downward bias for fiscal 2016 and 2017, however — in the past 60 days we’ve seen 7 and 4 downward revisions, respectively.
Altogether, we are witnessing a very public work in progress. Common wisdom continues to prefer the new Arconic brand for its growth and less dependency on its commodity prices, but we will continue to monitor progress going forward.
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