Alcoa Inc (NYSE:AA) has faced a lot of problems in the last quarter and was severely affected by lower metal pricing. The company recently released its 3Q2015 results, with a severe decline in its revenues, on a year-over-year basis. The surprising part is that the quarter did not just report a decline in earnings, but also reported a net loss. Consequently, the report also missed analyst estimates.
However, the worst part of this is that the company already caters to the international markets, which rules out business expansion as an option for recovery. Fortunately, Alcoa has begun working on its shortcomings and is taking several cost cutting initiatives. Furthermore, a growing demand for Alcoa products, in the aerospace and automotive industry should help the company do better.
The problems mainly lie in a slowing demand for Alcoa products in the construction and commercial transportation markets. The company expects a 2%-3% decline in demand for Alcoa construction products in Europe, over the next year. This is mainly due to the fact that Europe is not focusing on construction of non-residential buildings. Added to this, Alcoa is also experiencing a decline in the packaging sector in North America. A similar trend is expected to impact the Chinese market for Alcoa goods.
The market slowdown has also resulted in lower pricing of metal commodities. Since the global demand is declining, while the supply stays strong, the industry pricing is just going to get more competitive. This situation is expected to persist in the 4Q2015. Furthermore, delivering goods at a competitive price would be a very difficult task for Alcoa, since the company faces higher energy and raw materials cost, as compared to its competitors. Therefore, a reduction in the price of goods would mean a severe blow to profit margins for the company.
Even though an escape from this kind of a situation seems impossible, the company is actively exercising cost cutting measures, to change the scenario. One of the major steps taken by Alcoa in this regard has been the permanent closure of several smelters and lowering the production capacity. Added to this the company also plans to further limit its smelting capacity, along with some of its refining capacity. These practices are being undertaken in all of Alcoa’s offices around the globe, with regard to market demand in that region.
Coupled with this, the company has been downsizing in its upstream business, so as to improve its profit margins. In accordance with this plan, the company would optimize its portfolio and restructure high-cost assets as well. This would result in improved productivity gains. So far, the company has achieved 94% of its $900 million worth productivity gains target for 2015.
The only positive thing for Alcoa Inc (NYSE:AA), from the markets, is a growing demand for aluminum from the aerospace and automotive sectors. This is mainly due to a growing demand for more planes, air travel and a backlog from existing orders. Furthermore, the company’s recent acquisition of Firth Rixson, has helped improve Alcoa’s aerospace business. This has also positioned the company properly for future growth in the market. Coupled with this, a recent analysis by OEM identified that the demand for aluminum use in cars would double by 2025, which means more business opportunities for Alcoa, provided it can meet the competitor’s price.
The reasons to sell Alcoa are definitely stronger than reasons to buy the stock. However, if the company’s cost cutting plan is able to yield good results and improve Alcoa’s profit margins, then the company might have a chance to bounce back. For now it is a wait and see game for the investors, but the 4Q2015 and an investor update by the company for FY2016 would be crucial for the stock.