Alcoa (NYSE:AA) Falls After Earnings Beat, Weak Guidance

Alcoa, A BelLwether No Longer?

Alcoa’s (NYSE:AA) place as a bellwether of the economy has long-passed at least in its importance to the market. The company is no longer hailed as the first major report of the season, and it is no longer used as a gauge of market conditions but I think it should be. Aluminum and aluminum production are an essential link in the global economy and one that has great bearing on oh so many industries. With the global recovery still on shaky ground demand for aluminumis going to be a valuable indicator of future activity and Alcoa just gave weak guidance.

 Alcoa Beats But Shares Fall

Alcoa reported a solid quarter if not a great one and signs point to long-term health for the company. The $2.39 billion in revenue is up slightly on a sequential basis but still down on a YOY basis but only by 2%. The $2.39 billion is also slightly above the consensus estimate of $2.37 billion due to higher realized prices offset by lower shipments. Shipments were impacted by a strike at the San Ciprian facility. The strike and its cause, a much-needed restructuring, are not yet resolved so may impact results in the current quarter as well.

Moving down the report, the company’s margins and EBTIDA improved 27% sequentially do to higher aluminum prices, the company’s cash-saving/restructuring efforts, and portfolio changes related to the restructuring. Those gains were partially offset by rising costs but not enough to negate them. On the bottom line, the GAAP EPS of -$0.02 missed by a dime but adjusted earnings of $0.26 beat by $0.19.

“In a very challenging year, we set multiple production records, exceeded our goals for cash management, and made significant progress on our multi-year strategy,” said Alcoa President and CEO Roy Harvey. “We had a very solid fourth quarter, and the work we accomplished in 2020 positions us well to capture the benefits of an improved market.”

Alcoa Is Positive On 2021 But Guides Q1 Lower

Alcoa issued mixed guidance. The company says it is well-positioned for the coming year, especially in regards to aluminum and the value-added market, but the first quarter will be weak. The company set new records with its bauxite and western Australia alumina refining portfolio but says Q1 results will come in below Q4 for those segments. The increase in production is driving lower internal pricing for bauxite and higher sequential costs for alumina. For the year, the company is expecting total bauxite shipments to run in the range of 49 to 50 million metric tons in 2021 and13.9 to 14 million metric tons of aluminum.

“Primary aluminum consumption is expected to increase in both China and ex-China in 2021 with the recovery from the pandemic and the impact of additional stimulus measures. As supply growth is projected to be lower than demand growth, the global primary aluminum market is anticipated to be closer to balance in 2021.”

The guidance does include recently announced changes to the portfolio. The company recently sold or announced the divestiture of 3 facilities that will help it streamline operations and improve profitability. The divestitures will raise near $1.8 billion in cash the company can use to pay down debt, invest in growth, or buy back shares. The company expects the sales to impact net revenue by $0.8 billion.

The Technical Outlook: Alcoa Falls, Bulls Beware

Alcoa fell more than 2.0% on the Q4 release and guidance putting the stock in danger of a major correction. Price action is now below the short-term moving average where selling may intensify. There may be support for prices near the $21.50 level but there is no guarantee of it. If price action falls below the $21.00 to $21.50 level a fall to $20 or lower is very possible.