Q2 Earnings Preview: Alcoa At Crossroads Amid Commodity Recovery, Split-Up

(RTTNews) - Alcoa is expected to chime the bell, officially or unofficially, signaling the start of the second quarter corporate reporting season. The aluminum maker is widely expected to report declines in revenues and earnings.

Analysts, on average, expect the aluminum maker to report earnings of 10 cents per share, down from 19 cents per share a year ago. Revenues are estimated to have declined 11.80 percent to $5.20 billion.

A reconnaissance of its past earnings performance show that the company's bottom line results topped expectations in the two quarters preceding the second quarter. However, ahead of these two quarters, the company failed to meet Street expectations in the second and third quarters of 2015.

Analysts' expectations for the second quarter have not moved much in a span of over the past 90 days.

In late June, the company filed for a split off of its businesses in order to make it lean and efficient. The process is set to be completed by the second half of 2016.

Commodity Recovery

After a dismal run in the past 3 years- seen as a function of oversupply and waning demand amid lackluster macroeconomic conditions - things are looking up for commodities. Crude oil is up about 23 percent in the year-to-date period. This is despite the dollar faring better in the said period. (Dollar and commodities share an inverse relation as the latter is dollar-denominated).

Aluminum prices on the LME are up over 9 percent this quarter and about 9 percent higher for 2016-a more modest showing compared to oil and other base metal prices.

The company in its first quarter earnings release in April lowered its global aluminum demand forecast for 2016. The company lowered its aluminum consumption growth forecast to 5 percent from 6 percent, as it reduced its deficit forecast to 1.1 million tons from 1.2 million tons, citing slowing Chinese demand.

Additionally, China has been glutting the market with the metal, dampening the pricing side of the equation.

Lean, Mean - Way Forward

The mechanics of separation that Alcoa has planned is as follows-Upstream company carved out of the existing company through tax-free spin-off to existing Alcoa shareholders. Alcoa Corp. is to have within it five businesses, namely Bauxite, Alumina, Aluminum, Cast Products and Energy-all currently part of the Primary Products business and a Rolled Products business.

The parent company from which Alcoa Corp. is to be carved out will be called Arconic and own downstream businesses, including Engineered Products and Solutions, Global Rolled Products and Transportation and Construction Solutions businesses. Arconic is set to trade on the NYSE under the ticker symbol 'ARCN.'

Languishing After 2015 Selling Stalled

After a steep descent in first half of 2015, Alcoa's shares began consolidating and have been moving 8-10 price range. In a bearish signal, the longer-term 100-day MA is attempting to break above the shorter-term 50-day MA. Immediate resistance for the stock lies around 10.14 and the 10.97 levels offers next resistance. Downside support lies around 9.61, 9.11 and 8.11 levels.

In the year-to-date period, Alcoa, which has been knocked off the elite Dow 30 list, has gained 3.7 percent compared to S&P 500's 4.2 percent gain.

Deutsche Bank has a Buy rating on Alcoa and a $12 price target.