However, signs of hope point toward a light at the end of this tunnel. Volumes have picked up in Alcoa’s downstream business, compensating for lower prices with increased production. It’s a temporary measure to stabilize revenue and earnings, but if prices ever pick up, that trend will send Alcoa’s earnings higher and higher. The downstream business represents more than 70% of the company’s after-tax earnings; investors should hope for even more volume growth here in the future.
Alcoa still expects 7% growth this year. Higher margins and operating income reported today from its engineered products and solutions business and global rolled products division should help the company achieve that goal. Engineered products will probably remain Alcoa’s workhorse, as selling parts and materials to manufacturers such as automobile firms and aerospace companies will take advantage of these industries’ gains.
What does this mean for Alcoa’s stock? Don’t expect the turnaround immediately. Prices will continue to remain low as Chinese production of aluminum continues to grow and inventory remains high, and engineered products won’t be able to make up all that ground in just a few quarters.
For the long-term investor, however, the good from today’s earnings outweighs the bad. Increased downstream volume and improving performance from key divisions bode well for Alcoa’s future. This company’s on the right track, even if it is a slow track, to digging its stock out of the red. For investors, patience and a healthy long-term view are the right approaches with this pick.
The article Earnings Bring Hope for Alcoa’s Troubled Stock originally appeared on Fool.com.
Fool contributor Dan Carroll and The Motley Fool have no position in any of the stocks mentioned.
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