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Bear of the Day: Alcoa Corp. (AA)

Ryan McQueeney

The market is in the middle of quite the interesting earnings season, as Wall Street’s continued recovery from the Q4 selloff feels somewhat contingent on strong results over the next few weeks. Regardless, investors should remember that post-earnings trends often take time to develop, and that means avoiding stocks that did not impress with their reports already.

One such example is Alcoa Corp. (AA). The aluminum producer posted its latest quarterly results last week, and figures for the reported quarter were modest. Adjusted earnings came in at 66 cents per share, which cruised past the Zacks Consensus Estimate. Revenue of $3.35 billion edged out estimates of $3.34 billion.

However, Alcoa’s earnings in the period were down significantly from the $1.04 witnessed in the year-ago period. This represents a year-over-year decline of 37% and marks the second consecutive quarter of EPS contraction for Alcoa. The company faced pressure from a drop in aluminum prices and a decrease in the price of energy sales in Brazil.

The issue with these market challenges is that they are coming at a time when other costs are rising. Alcoa reported a year-over-year COGS increase of $230 million, outpacing its gain of $170 million in revenue. COGS as a percentage of revenue increased to 75.7% from 72.5% last year.

Concerns with Alcoa also relate to fears that the global economy is moving past peak growth. Alcoa itself said that it expects the world’s alumina deficit of 2018 to turn into a surplus by the end of 2019. This suggests a slowdown in demand, which signals sluggishness in key economic indicators such as manufacturing.

Alcoa’s report and the sentiment that emerged from it immediately sparked a series of negative earnings estimate revisions for the company. In just the past week, three analysts have adjusted their 2019 EPS estimates to the downside, bringing the Zacks Consensus Estimate down to $1.93 from $2.67.

This is a trend that was already starting to develop prior to last week’s report. In fact, Alcoa’s 2019 estimates have seen seven negative revisions in the past 60 days, and the consensus has fallen from a peak of $4.06 to where it stands today. That represents a roughly 52% drop in Alcoa’s earnings consensus for the year. Earnings for 2019 are now expected to decline 46%.

The company’s earnings consensus for 2020 has not fared well either. In the past 60 days, Alcoa has witnessed five negative revisions to its 2020 EPS estimates, dragging down the Zacks Consensus from $4.19 to $2.72 in that time. This move is a decline of 35% in the consensus.

Alcoa shares are down about 34% in the past six months, as investors were able to see what falling aluminum prices and slowing global growth could do to the company’s earnings outlook well ahead of time.

Even still, the value case for Alcoa is not apparent. On a forward 12-month basis, the stock is trading at 12.2x earnings. That’s near the highest forward earnings multiple it has seen in the past six months, reflecting the severity of the drop in its 2019 consensus.

Negative revisions have earned Alcoa a Zacks Rank #5 (Strong Sell). Its peers in the “Metal Products – Distribution” group, Lawson Products (LAWS) and Reliance Steel & Aluminum (RS), both have #3 (Hold) ratings. These might be better options than Alcoa right now, but the group remains in the bottom 6% of the Zacks Industry Rank and has returned -33.5% in the past year. Questions about the future of demand the near-term direction of global economies seems to have hit these stocks hard.

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