Argus Downgrades Alcoa, Sees Weak Near-Term Earnings

  • The share price of Alcoa Inc AA has declined 55.8 percent over the past one year, touching a low of $7.13 on January 13.
  • Argus’ David Coleman has downgraded the rating on the company from Buy to Hold.
  • Coleman believes that although the stock offers value, earnings expectations were likely to continue to decline ahead of the scheduled split-up of Alcoa in 2H16, which could further pressure the stock.

Analyst David Coleman explained, “The company is undergoing a transformative restructuring that appears promising over the long term. But near-term earnings are more of a problem.”

The company has been facing challenges due to the declining commodity prices, unfavorable currency movements and slowdown in China. Coleman believes that many of the factors affecting Alcoa are beyond management’s control.

Related Link: Deutsche Bank Is Buying Alcoa The Day After Earnings

Alcoa's Split

On September 28, Alcoa “announced that it would split into two independent companies, separating its bauxite, aluminum and casting operations from its engineering, transportation and global rolled products businesses,” according to the Argus report.

The split will create one company focused on higher-value engineering products, including the aerospace and automotive business, while the other would focus on commodity aluminum production and would retain the Alcoa name.

Coleman mentioned the downstream businesses contribute about 60 percent of the sales and 80 percent of the earnings, and have been consistently beating expectations, driven primarily by robust growth in the automotive and aerospace markets.

Alcoa reported its 4Q results on January 11, significantly lower than the prior year, but ahead of the consensus.

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Posted In: Analyst ColorLong IdeasDowngradesCommoditiesMarketsAnalyst RatingsTrading IdeasArgusDavid Coleman
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