Alcoa's Management Sets the Tone for Earnings Season

By Lee

Alcoa earnings usually set the tone for the earnings season, and not just because of the "AA" ticker. Its position as a major aluminum and alumina supplier means if companies are cutting back or increasing production, then Alcoa will hear about it first. Moreover, CEO Klaus Kleinfeld always gives good commentary on the company's trading environment. Let's run down the major changes in its end-market outlook and take a guess at how the earnings season will shape up for the industrial sector.

Winners and losersThe following table summarizes Alcoa's 2015 outlook given throughout the year, So, for example, at the end of 2014, management predicted 9% to 10% growth in the aerospace market, but in the third quarter, the forecast was at 8% to 9%. The outlooks changed are in bold.

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Source: Alcoa presentations.

Industrial Gas Turbines and Aerospace The big winner from this quarter, and the year, is industrial gas turbines. It's the only industry for which Alcoa's forecast for full-year growth has increased from the estimate given at the start of the year. I think this could be good news for General Electric Company .

On Alcoa's earnings call, Kleinfeld spoke of power markets "moving more to higher-value products and new efficiency turbines with advanced technology" and stated that the 60 Hz market -- primarily used in the U.S. -- was seeing 19.7% growth year to date with "strong demand also of spares and component upgrades of existing turbines." Kleinfeld's commentary augurs well for future orders of General Electric's new H-Class turbine in its core U.S market.Indeed, according to General Electric CEO Jeffrey Immelt on the latest earnings call, the company has 67 H-turbine technical selections -- up from 61 in the previous quarter -- and 21 in backlog.

Moreover, General Electric is also a major commercial aircraft engine manufacturer, and the maintenance of Alcoa's aerospace growth outlook is good news. Kleinfeld's view is that a combination of passenger growth, aircraft retirements, and the increased efficiency of next-generation aircraft will cause the market to "grow pretty substantially until 2019."

Automotive and Building & ConstructionDon't be fooled by the headline data. The overall outlook for both sectors was lowered in the third quarter, but in both cases it's because of weakening growth in China. In fact, the following breakout of the automotive outlook by region demonstrates that, according to Alcoa, conditions are improving in the EU and North America.

Source: Alcoa presentations.

Kleinfeld referenced particular strength in North American light-truck sales and said that Europe's export market growth of 3% -- partly because of a stronger U.S. dollar -- is helping to fuel a stronger outlook. However, China's automotive outlook is clearly softening, and the country's building and construction outlook is losing steam, too:

Source: Alcoa presentations.

Again, note that North America's and Europe's outlooks were left unchanged while China's was reduced for the second quarter in a row.

Heavy-Duty Truck & TrailerIn the Heavy-Duty Truck & Trailer segment, again, China is the culprit, with the country's full-year end market outlook reduced from a range of negative 2% to positive 2% at the start of the year to a range of negative 22% to negative 24% currently. Kleinfeld referenced the pull-ahead that occurred in 2014 as being due to tighter emissions standards implemented in 2015 -- something likely to cause a tough sales comparison in 2015. However, the reduction in expectations has been dramatic through the year, suggesting that China's heavy-duty truck market is weakening on an underlying basis, too.

Source: Alcoa presentations.

Key takewaysAlcoa pretty much set the tone for an industrial earnings season that will be marred by talk of a slowing China. However, Europe's outlook appears to be getting slightly better. It's a theme picked up by General Electric's recent results, where Immelt described the U.S. as "OK" and Europe as "appreciably better" but spoke of "headwinds" in growth markets.

In addition, industrials with favorable exposure to aerospace and industrial gas turbines -- General Electric springs to mind -- look set to do relatively better. In terms of the automotive and building and construction markets, the big question is whether your stock has favorable exposure to North America and Europe, or overexposure to a weakening China market.

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Lee Samaha has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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