Tuesday, January 15, 2013

What Alcoa's Outlook Means to the Market

The symbolic start to earnings season occurred yesterday when Alcoa (NYSE: AA) gave its Q4 earnings report. In summary it was a positive report for Alcoa in terms of its efforts to get back to cash flow generation but a slightly disappointing one for growth outlook in the Western world. Alcoa appears to be pinning its colors to the Chinese mast. In this article I will round up what Alcoa said, give my take on it and, then suggest some other stocks to look at it.

Alcoa’s Growth Predictions In 2013

I’ve summarized Alcoa’s outlook for 2013 from its results presentation below.




A look back at how these trends developed over 2012 can be found in an article linked here. As for 2013, what stands out is how much Alcoa is relying on China for growth. This is wonderful if it occurs but somewhat problematic if it doesn’t.  Listening to the associated commentary, Alcoa is clearly hoping that the economic stimulus program works as expected and creates a rebound in China’s growth path. Indeed, its CEO declared that he saw a ‘good chance’ that growth could get back to above 8%.

This is a heartening statement from such a widely respected business leader, but I can’t help noting that China’s officials are talking about growth in the 7.5% range and the last thing they seem to aiming for is pumping money into the kind of fixed asset investment that directly benefits Alcoa. According to most sources, the Government's spending programs will be different from those of 2008-09.

Aerospace and Automotive

Aerospace growth accelerated throughout 2012 and the year end number of 13-14% was slightly above the 13% forecast in Q3. Furthermore, the forecast of 9-10% for 2013 is predicated on the strength of the backlog of orders at Boeing (NYSE: BA) and Airbus. Alcoa also forecast a sequential yearly increase in passenger traffic and increased profitability for the airlines. These really are the key metrics for the industry but again, I would caution how much this relies on China and emerging market growth.

The marginal growth in air passenger traffic demand is mainly coming from emerging markets, and it is airlines servicing those markets (either directly or through leasing) as well as budget airlines that are the main contributors to new aircraft orders.  However, if growth in China et al disappoints in 2013 you can expect Boeing to see orders delayed or canceled. There is no doubt that Alcoa’s bullish outlook on China has caused it to be positive on commercial aerospace, so investors should not assume that this market can be viewed in isolation.

It is a mixed story in automotive where decent growth is forecast for the US. I happen to think there is a possibility that it could be stronger than expected. There are real signs that US financials are set to loosen lending standards as interest rates remain accommodative and employment picks up. Throw in a historically aging fleet and it’s reasonable to expect continued strength in US car sales.  European demand is expected to slow its rate of decline and China’s is expected to rebound in line with Alcoa’s view of the economy.

Heavy Truck & Trailer and Beverage Can Packaging

Heavy truck and trailer was a market that progressively declined in 2012 throughout all major territories. This is going to be another tough year for the leading companies in the industry and I would note that any global growth for 2013 will entirely rely on China. With that said, transportation is a cyclical industry, and any better than expected GDP growth in the US or Europe will help the matter significantly.

Perhaps the most positive global synopsis was reserved for beverage can packaging. This market trended better throughout the US in 2012 and remained solid in Europe, but China saw expectations downgraded towards the end of the year. This was worrying for companies like Ball Corp (NYSE: BLL) because it has been shifting capacity to emerging markets in line with contractual demand for customers expanding in those regions. As such Ball is lumbered with fixed costs if things go wrong. No matter. Alcoa is predicting a rebound in growth in China with conditions stabilizing in the US and Europe seeing 2-3% growth.

Commercial Building & Construction and Industrial Gas Turbines

The global commercial building market remains an imponderable. Here again Alcoa is predicting a rebound to a higher growth rate in China but I’m not so sure for the reasons expressed above. As for the US, there is some discussion linked here on why investors can expect some upside surprise in 2013 from the sector. Indeed, Alcoa cited similar arguments. Interestingly the rate of decline in Europe appears to be slowing. This is good news for a globally exposed construction play like Whirlpool (NYSE: WHR). The company has made great strides in restructuring and any kind of positive developments in Europe (where it still has large exposure) would likely drop into the bottom line. Similarly its main emerging market is Brazil so it maybe relative unaffected by any major slowdown in China’s housing market.

Finally, shareholders in General Electric (NYSE: GE) will be pleased by the continued solid 3-5% growth forecast for industrial gas turbines globally. It is a major profit driver for GE and looks set to hold up well as natural gas increases in popularity. Of course this forecast is somewhat reliant on natural gas prices staying low. The cheaper they are, the more likely it is that electricity producers will use gas rather than coal, and when turbines are run they eventually need repair or servicing.

The Bottom Line

In conclusion, Alcoa is relying an awful lot on China in 2013, but I think there are other elememts of the global economy that could surprise on the upside. Moreover, the good news on turbines, packaging and US construction should not go unnoticed by investors.

No comments:

Post a Comment