Alcoa (NYSE:AA) kicked off earnings season by beating reduced expectations by a penny. The corporate story is cash flow is improving and market fundamentals are also looking good. They have done much heavy lifting and amputated low margin low productivity operations, usually much to the shock of local union organizers.
What more can be done to improve productivity? Nothing major. Unless a wild-eyed scientist invents something over night investors can assume that road leads nowhere.
Demand from China is widely viewed as declining. Indonesia supplies 80% of bauxite that China needs. Indonesia has announced bauxite export reductions.
Bauxite is a geo-politically sensitive commodity. China may experience demand fluctuations but will still view supplies on a long-term perspective. They of course will buy for their account without concern for Alcoa’s future.
So what is the best move to secure the future. You can sit back, declare yourself a commodity play and ride the pricing roller coaster. Or you can go out when demand is shrinking and valuations softening and make the bog bets that will create dominance in the future.
Passive strategies probably will not carry the day.
George Gutowski writes from a caveat emptor perspective.
- Low aluminium prices hit Alcoa (bbc.co.uk)
- Alcoa: Earnings Insight (seekingalpha.com)
- Alcoa Beats Estimates for Q2 Earnings (valuewalk.com)