I mentioned a couple of days ago that the most critical component of a company's earnings report is the forward guidance they provide. Rarely is this included in the earnings news release, but it's always available in the conference call following the release. The companies website - along with several other internet sites - provide a transcript of that conference call, and it's always worth scanning for broad market information.
Alcoa (NYSE: AA) reported fourth quarter 2014 earnings after market close today. They reported $6.4 Billion in revenue, beating market expectations of $6.02 billion, and excluding one-time charges, they had earnings of 33 cents per share, well ahead of analyst expectations of 27 cents per share. Both of these numbers signaled a successful 2014 for the aluminum giant.
The most important information, however, was gleaned from their conference call. While we're certainly interested in how we believe the company will fare in 2015, we should also pay attention to what they are telling us about the domestic and global economies and what they signal for other industries. In this case, the forecast was fantastic for the aerospace industry where Alcoa is expecting aerospace sales to increase 9-10%. They see this demand in large commercial aircraft, regional aircraft, and in aircraft engines. This is an indication for us to keep an eye on that sector for potential investment opportunities. Here is a link to the companies in the aerospace sector for your convenience.
On the automotive front, Alcoa is projecting global production of 2-4% "driven by replacement demand and low
lending rates in North America and both the growth of the middle class
and clean air regulations in China." I find the phrasing of that statement interesting. Low lending rates in the US should help the US auto industry, but of extreme interest is their forecast of the growth of the middle class in China. Chinese growth is a main driver in many industries, and it's encouraging to see Alcoa's statements to that effect. We will keep an eye on the automotive industry, although 2-4% isn't really making me yearn to own stocks in that sector.
Alcoa made some very strong projections for the building and construction market, seeing global growth of 5-7%. They caution that they expect a decline in that market in Europe, however, which implies that the global growth will be primarily in China and India. That matches our expectations that Europe is likely heading into recession, but their decline will be well offset by strong growth in Asia.
Projections for the trucking and freight market in North America show strong growth. That hints at strength in the transportation sector as well as the consumer staples and possibly the consumer discretionary sectors. Trucking and freight companies need something to ship, and if growth is strong, it means consumers and businesses are buying. That's good news for overall economic health in the US.
Interestingly, they saw the aluminum market holding steady at 7% growth in 2015. There are several new players in the global aluminum market, and they will be adding pressure to the price (and thus the revenue side of Alcoa's financial equation) but continued increased demand in China should offset that pressure.
Overall it looks like Alcoa is forecasting sustained growth in Asia for 2015, and that's good news for the overall US market.
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