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Alcoa’s latest earnings report contained bad news on two fronts—the aluminum company sees a grim outlook for industrial demand, and its profit was smaller than expected—yet the shares were up almost 11%.
Investors in the beaten-down stock, a former component in the Dow Jones Industrial Average, appeared to welcome an effort to shake up the business, disclosed along with the earnings on Wednesday evening.
Alcoa stock (ticker: AA) remains down about 20% year to date, reflecting how much China’s economic weakness hurts the performance of basic-materials producers. The metals and mining components of the S&P 500 are up about 7% year to date, worse than the 20% gain in the broad index.
The stocks peaked around January 2018, shortly after Chinese manufacturing indexes began to slip. China, of course, is the dominant consumer of many commodities including copper, aluminum and steel.
Alcoa cut its forecast for growth in global aluminum demand, saying consumption will shrink this year, Previously, Alcoa estimated demand would grow about 1.8%.
“This year’s trade tensions, low trade volumes and the declining growth in manufacturing activity have lowered our expectations for this year’s global aluminum demand,” said CEO Roy Harvey on the company’s earnings conference call.
Harvey doesn’t see things improving yet. “It’s really about the uncertainty right now sitting in the economy, and whether that’s trade war-focused or macroeconomy is beyond my ability to explain clearly,” he said.
Most investors blame trade. Harvey isn’t sure, but regardless of the reason, confidence among CEOs is waning. “CEOs hate uncertainty,” Barry James, CEO of James Investment Research, tells Barron’s.
He—like the Alcoa CEO—isn’t certain of when uncertainty will end. Trade weighs heavily on James’ mind as do protests in Hong Kong. “They are another sign uncertainty will persist for longer,” James said.
In response to the greater uncertainty and lower growth, Alcoa announced it was reviewing what to do with more of its producing assets. On the list are some aluminum-smelting as well as alumina-mining operations. Alumina is a key raw material for aluminum.
“It’s an improve, close or sell review, right?” CFO William Oplinger said rhetorically on the conference call. “So there are three options for these facilities.”
Alcoa stock is rallying because it is cheap. Shares are trading near 52-week lows and the company is valued for less than the replacement cost of its assets.
That isn’t enough, however, for Bank of America analyst Timna Tanners to recommend buying the stock.
“We stay cautious on aluminum and see limited catalysts and muted free cash flow given a pattern of divestitures and closings that require cash outlays,” wrote Tanners in a Wednesday evening research report. She rates shares the equivalent of Hold with a $21 price target, very close to recent trading levels.
Write to Al Root at allen.root@dowjones.com