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Can Arconic (ARNC) Maintain Earnings Beat Streak in Q4?

Anindya Barman

Arconic Inc. ARNC is scheduled to come up with its fourth-quarter 2018 results before the opening bell on Feb 8.

Arconic’s earnings of 32 cents per share for the third quarter of 2018 topped the Zacks Consensus Estimate of 30 cents, translating into a 6.7% positive surprise.

Revenues rose around 9% year over year to $3,524 million in the quarter, also beating the Zacks Consensus Estimate of $3,484.3 million. The company gained from higher volumes across the board on the back of growth in automotive, aerospace engines, defense and industrial, commercial transportation as well as building & construction markets.

Arconic has an impressive earnings surprise history. It beat estimates in each of the trailing four quarters, delivering an average positive surprise of 17.4%.

Arconic's shares have lost around 10.9% over the past three months compared with the roughly 11% decline recorded by the industry.

 

Arconic's shares took a tumble last month after it said that it is no longer pursuing a potential sale of the company. Private-equity firm, Apollo Global Management had been reportedly in talks to buy the company.

However, Arconic, last month, noted that it will continue with the sale process of its Building and Construction Systems (“BCS”) business, a leading supplier of building materials and construction systems.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Arconic, in its third-quarter call, provided an updated guidance for 2018. It now expects adjusted earnings in the range of $1.28-$1.34 per share, up from the prior expectation of $1.17-$1.27 per share. However, it continues to expect revenues for 2018 in the range of $13.7-$14 billion and adjusted free cash flow of roughly $250 million.

The Zacks Consensus Estimate for revenues for Arconic for the fourth quarter stands at $3,406 million, reflecting an expected year over year growth of 4.1%.

Arconic is focusing on cost reduction and operational improvements across its businesses, which should lend support to its bottom line. The company will likely to benefit from its cost saving actions in the to-be-reported quarter.

Arconic is also seeing strong momentum in automotive, driven by the transition of the auto industry to lightweighting. Moreover, the company is witnessing healthy demand trends in the aerospace market and is actively pursuing its aerospace expansion strategy. It is well placed to gain from major contract wins in aerospace.

Arconic is witnessing strong momentum in aero engines and aero defense markets. Strong volume gains in the commercial transportation market is also contributing to its revenue growth. Momentum across these major markets is expected to continue in the fourth quarter, providing support to the company’s top line.  

Moreover, the company now sees an unfavorable impact from aluminum prices of around $100 million on its operating income for full-year 2018 on a year over year basis factoring in its lower aluminum price assumption for the fourth quarter. This is an improvement compared with its earlier projection of $130 million headwind for the year. The unfavorable impact of aluminum prices on the company’s operating income was $1 million for the third quarter and $58 million for the first three quarters of 2018.

Arconic Inc. Price and Consensus

 

Arconic Inc. Price and Consensus | Arconic Inc. Quote

What the Zacks Model Says

Our proven model does not show that Arconic is likely to beat estimates this quarter. That is because a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below:

Earnings ESP: Earnings ESP for Arconic is +3.39%. This is because the Most Accurate Estimate is currently pegged at 31 cents while the Zacks Consensus Estimate stands at 30 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Arconic currently carries a Zacks Rank #4 (Sell). Note that we caution against stocks with a Zacks Rank #4 or #5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies in the basic materials space you may want to consider as our model shows they too have the right combination of elements to post an earnings beat this quarter:

New Gold Inc. NGD has an Earnings ESP of +166.67% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Franco-Nevada Corporation FNV has an Earnings ESP of +3.05% and carries a Zacks Rank #2.

Teck Resources Limited TECK has an Earnings ESP of +6.03% and carries a Zacks Rank #3.

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