The global economy has not been kind to materials stocks in the last decade, and the financial crisis and consequent downturn in growth did little to help, drawing a line in the sand for the likes of aluminium producer Alcoa.
The company was recently excluded from the Dow Jones, prompted by its low stock price and the index committee’s desire to diversify the sector and industry group of the blue chip.
In the same way that many stock prices benefit from inclusion in such elusive company, the removal was not all that kind to Alcoa. Seeing a stock that once traded at $48 a share in July 2007 bottom out at $5 in March 2009 is not that unusual when one looks at charts over the past five to six years, but Alcoa has been slow to recover relative to equities in other sectors that aren’t related to cyclical growth.
Often seen as an economic bellwether, the earnings date for the aluminium giant has always been eagerly awaited and generally marks the start of US earnings season. In fact, Alcoa succeeded in beating analysts’ revenue and EPS expectations when they reported Q3 earnings. We have since seen a 37% rally over the past three months which has driven the share price through the pivotal $10 mark for the first time since April 2012. This may provide a base for price action now.
Price of aluminium
Aluminium prices have seen some marginal upward momentum lately, helped by the announcement of quantitative easing tapering last month. Normally a stronger dollar would put downside pressure on commodities, yet the vote of confidence in the US economy – along with the promise of low interest rates for the foreseeable future – has helped to negate this to a degree.
Prices have been capped by the 200 daily moving average since March last year. This metric was tested at $1842 once again in the final days of trading in 2013 and, while we have seen gains of 4.4% in December alone, China’s poorer-than-expected factory output data has weighed on the price again. High inventory holdings in the metal relative to demand appear to be keeping a lid on upside at this time. Unless we see a pullback in smelting capacity from other aluminium producers (especially the Chinese companies) we can probably expect the commodity price to weigh on the earnings and revenue of Alcoa.
Outlook from the company management will be very important as, while there is a distinct feeling that global economies are starting to come out the other side of the financial crisis and recession, it may now be a little too early to buy into future strength. However, given that Alcoa expects 2014 global demand to grow 7%, a short-term trade cannot be ruled out.
Global equity climate
There is a streak of positive sentiment in equity markets today, underpinned by yesterday’s better-than-expected trade deficit data yesterday showed record export numbers for the US. This year equity trading will depend more greatly on underlying fundamentals rather than the less-than-skilful ‘buy on the dips’ methodology which has been the theme over the past couple of years. Investors cannot depend on the easy liquidity and loose monetary policy that has formed the basis of this investment strategy anymore.
Alcoa’s fourth-quarter and full-year earnings are due on 9 January, with sales estimated to come in at $5.4 billion with earnings-per-share down slightly at 5c. It is also important to bear in mind that the company has beaten consensus in the past three quarters –I would not be surprised to see sales for Q4 actually come in closer to the $5.8 billion mark.