Key Drivers Of Alcoa’s 4Q14 Earnings
An Investor’s Guide To Alcoa’s 4Q14 Earnings (Part 5 of 16)
Key drivers
Previously, we saw that Alcoa (AA) topped the average Wall Street expectations with its 4Q14 earnings. Alcoa’s net income surged more than ten times over 4Q13. Let’s look at the key drivers of Alcoa’s fourth-quarter earnings.
Market
As seen in the above chart, market forces had a positive impact of $170 million on Alcoa’s 4Q14 earnings when compared to 4Q13. Higher aluminum prices had a positive impact of $133 million in the fourth quarter. These market factors are beyond the control of Alcoa’s management.
Performance
The biggest contributor to Alcoa’s higher 4Q14 earnings was its robust operating performance. Alcoa recorded productivity-related gains of $210 million in the fourth quarter. A better price mix also had a positive impact of $153 million in 4Q14, as seen in the above chart.
Alcoa’s transformation was instrumental in encouraging these operational improvements. The company focused on reducing costs in its upstream business. Plus, it is adding more value-added products to its portfolio, which improve the products offered to its customers.
Constellium (CSTM) is a major value-added player in Europe. Century Aluminum (CENX) also signaled that its future investments contribute to growing its value-added business. These companies, as well as Rio Tinto (RIO), are part of the SPDR S&P Metals and Mining ETF (XME).
Higher costs
Higher costs offset the gains realized from market and productivity improvements. Alcoa incurred higher costs in 4Q14 primarily due to higher maintenance expenses, portfolio action costs, and LIFO (or last-in, first-out) inventory expenses.
In the next section, we’ll look at the performance of Alcoa’s various business segments.
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