Alcoa's Near-Term Earnings Are The Problem

While the transformative restructuring being undertaken by Alcoa Inc AA appears to be promising in the long term, the company’s near-term earnings are expected to be under pressure, Argus’ David Coleman said in a report. He maintained a Hold rating on the company, saying that the shares may be “hurt by uncertainty surrounding the planned business separation in 2H16.”

Separation Anxiety

Over the past quarter, Alcoa’s shares underperformed a little, gaining 4.1 percent, versus a 4.7 percent in the S&P 500. Alcoa is in the midst of a transformative restructuring; and plans to split into two independent entities, which would create one company focused on commodity aluminum production, and another focused on higher-value engineered products.

Alcoa expects to complete this separation in 2H16, and the uncertainty surrounding this plan could keep Alcoa’s shares under pressure in the near term, analyst David Coleman mentioned.

Earnings Headwinds

Coleman noted that Alcoa faces three challenges that could adversely impact its near-term earnings and result in downward revisions in estimates:

1. Slumping commodity prices
2. Slowdown in China
3. Unfavorable currency translation

Alcoa’s earnings have been weak and several of the challenges being faced by the company are outside management’s control, the analyst commented.

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