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Alcoa Inc (AA)’s Earnings: So What?

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Aluminum maker Alcoa Inc (NYSE:AA) announced earnings after market close on July 8, beating estimates both on total revenues and earnings, even as it saw both figures decline from the year-ago results. And while much of the decline is a direct result of the commodity price of aluminum, the company expects to see a “7% growth in the demand” of aluminum this year. Simply put, only a handful of analysts and investors watching the Alcoa Inc (NYSE:AA) results really care about Alcoa Inc (NYSE:AA). But as a “bellwether” of so many other industries, and to a lesser extent the economy in general, its performance is pretty central to getting an idea how everything else could be doing.

Add in that a number of large aluminum users are great investments, and it’s a worthy topic for investors to understand.

Alcoa Inc (NYSE:AA)

Economy slowly, slowly improving

While depressed aluminum costs will drag on Alcoa Inc (NYSE:AA), this is is a positive for the companies that consume it. Add in a forecast for increased demand for aluminum, and it’s an indication that the slow but steady economic growth that we’ve seen should continue. And with aluminum consumed heavily in aerospace and automotive, there are multiple companies out there that deserve a little deeper look to see if this is a good opportunity to invest.

Already a high flyer?

Aerospace giant The Boeing Company (NYSE:BA) has had a bit of a tough year, if you believe the news. Numerous problems with the flagship 787 Dreamliner, including battery problems, grounded the new superjet within months of first hitting the skies. Recent oil filter and engine problems have also temporarily grounded planes. And while one would think this could make for a temporary dip in shares, the opposite seems to be true: Shares are up 39% YTD, to nearly $105.

And while this might indicate it’s not a good time to buy, looking at the forward PE ratio, which is based on future earnings, and TTM PE ratio, aren’t exorbitantly high at 16.6 and 19.6. And with projected growth in aircraft sales for the next few years, especially the Dreamliner, it’s worth at least keeping an eye on The Boeing Company (NYSE:BA).

And as to the media hubbub about the numerous problems? Mostly just noise. It’s a new plane, and revolutionary at that. Eventually the media attention will die down, and so far I don’t see any material harm done to the company.

On the other hand, Lockheed Martin Corporation (NYSE:LMT) looks cheaper on the surface, with PE ratios (both TTM and forward) below 13, even with the nearly 20% run-up shares experienced in the first half of the year. However, I’d caution you to remember that the “sequester” is continuing, and there’s a distinct possibility that this could have an effect on the Joint Strike Fighter program in the next few years. Factor in a tough economy in Europe, and this could further impact sales of the F-35 to US allies.

Driving too fast?

Ford Motor Company (NYSE:F)’s rebound is a thing of the past- it’s all about continued execution now. It’s growing stable of hybrids, the revamped Mustang, and the best selling F-Series pickups all heavily feature aluminum, so projected low costs are favorable in the interim, just as Alcoa Inc (NYSE:AA)’s prediction of increasing demand could indicate good things. Sure share prices are up 35% YTD, and this has also pushed up the valuation, but trading at a PE below 12, while the economy and market for its products continues to improve, seems to be a double-whammy of an opportunity to get in for the long-term.

But with that said, there is reason to wonder if auto sales will ever return to pre-recession levels on a sustained basis. It seems that many Americans have learned to make do with older cars for longer periods, and this pattern could continue and limit domestic upside. However, even with the slowing growth in Asia, this market is massive, and where the real opportunity lies.

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