Alcoa- Seeking Growth From Split

(RTTNews) - Gone are the days when Alcoa lead the parade of companies set out to divulge their quarterly score card to the Street. Incidentally, PepsiCo. (PEP) pipped past Alcoa and reported forecast-beating results on Tuesday. Alcoa had even exited the Dow Industrial Average two years back, reflecting its waning importance to the economy and markets. Nevertheless, the company's name still evinces interest among traders who are enamored with old economy stocks. The twist in the tale provided by Alcoa's recent announcement of a split into two companies would leave traders wanting for additional clarity on the prospects of the two companies.

The stock is a pale shadow of its old self, trading well off its pre-recession closing highs of over $47 hit in 2007. However, the steep descent seen for much of 2015 has brought valuations to levels, which could be deemed attractive. It trades at roughly 14.5 times its forward 12-months earnings multiple.

Analysts polled by Thomson Reuters now expect the aluminum maker to report earnings of 14 cents per share, higher than 11 per share in the year ago period. However, revenues are expected to decline by 9 percent to $5.68 billion. Over the quarter, analysts have gradually trimmed their average estimate from 19 cents. In the past four quarters, the company's earnings beat expectations in three and were below estimates in the second quarter that preceded the recently concluded quarter.

After finding support at a long-term support level of a little over $8 in late August, Alcoa's stock reversed course along with the broader market, which also came under intense pressure in the wake of Fed rate hike fears. The company's announcement of its intention to split into two public companies in late September provided further thrust to the stock. The split is expected to be completed only by the second half of 2016.

Nestled between its 100-day MA of 10.55 and 200-day MA of $12.55, the stock could take off further towards its next resistance levels of $14.5 and $17.20 or retest a key support around $8.

On marking to market LME aluminum prices with a 15-day lag and considering a premia for a realized price of $0.85 per pound, Deutsche Bank Securities expects earnings to declined 17 percent sequentially to 14 cents per share. The firm expects the company to record a charge of $42 million related to the closure of its Suralco refinery.

The fundamental picture is not very rosy. The upstream businesses of melting, refining and smelting which churn out alumina and primary metals, could be squeezed by falling commodity prices. Added to that, is the commodity guzzling China risk, with the nation exercising clout over the aluminum market and dictating prices.

In the lat twelve months ended June 2015, revenues from the upstream business was $13.2 billion, with roughly 72 percent from alumina. In terms of profitability, the business contributed $2.8 billion in EBITDA. At the same time, the value added company fetched $14.5 billion in revenues and $2.18 billion in EBITDA. With the scope of margin expansion in the value-added company businesses very high, the split is expected to eventually make better sense.