Alcoa's Mixed Results Hide Longer-Term Improvement

Traditionally, aluminum specialist Alcoa opens each quarter's earnings season, and even though the company has lost much of its stature in recent years, investors still look closely at its results to gauge the health of the entire industrial economy. Yet after mounting a strong comeback in 2014, Alcoa shares have taken a hit so far in 2015, as investors worry that the aluminum market won't cooperate with the company's overall strategic plans.

In its first-quarter report Wednesday night, Alcoa posted mixed results that disappointed many shareholders, but many aspects of Alcoa's long-range strategy remain intact. Let's take a closer look at Alcoa's results from early 2015 and what they suggest for both the current earnings season and the company's future.

Alcoa posts light sales but solid earnings On their face, Alcoa's latest results continued their growth trends from 2014. Revenue jumped 6.7% to $5.82 billion, and the company reversed a year-ago loss with earnings of $0.14 per share. Moreover, after adjusting for charges related to restructuring and other special items, adjusted earnings of $0.28 per share topped the consensus estimates by $0.02. The problem, though, is that investors had expected sales growth more than two percentage points higher than Alcoa achieved, signaling an apparent deceleration in the pace of the aluminum company's revenue gains.

The results in Alcoa's major business segments confirmed the mixed performance throughout the company. The key Engineered Products and Solutions business had after-tax operating income rise just 1% from the year-ago quarter, with Alcoa pointing to unfavorable pricing and product mix as well as the strong U.S. dollar as offsetting higher sales volume in key industries like aerospace, commercial transportation, and non-residential construction markets in North America. Global Rolled Products saw operating income drop by more than 40% as conditions in the global markets were extremely unfavorable, especially in Russia. Alcoa's Alumina and Primary Metals segments did quite well, though, with Alumina operating income more than doubling, and Primary Metals seeing another profit on 10% higher prices compared to last year's first quarter.

CEO Klaus Kleinfeld. Source: Alcoa.

Alcoa CEO Klaus Kleinfeld didn't linger on the results of the individual segments, instead pointing to the progress the aluminum specialist has made in its longer-term transformation. "We are organically and inorganically broadening our innovative, multi-material value-add businesses," Kleinfeld said, "bringing new capabilities and materials to our aerospace and automotive offerings, and taking swift action in the upstream, making it more competitive."

The next step in Alcoa's evolution Much of the progress Alcoa has made lately centers on its desire to take advantage of the best opportunities to go beyond its commodity business and focus instead on value-add products. Along those lines, the company's recent announcement that it will acquire RTI International Metals is just the latest in a series of product-broadening strategic moves, with RTI's strength in titanium complementing Alcoa's aluminum expertise to enable the company to address more of the needs of key markets like aerospace. With Alcoa projecting 9% to 10% growth in global aerospace sales -- the highest growth rate of Alcoa's industry projections -- catering to aircraft manufacturing makes a lot of sense right now.

Source: Alcoa.

Nevertheless, Alcoa also recognizes its role in providing aluminum to all levels of the market, and it sees solid gains ahead. The company projects aluminum demand to grow to a record 57.5 million tons in 2015, up 6.5% from its final 2014 estimates. Yet rather than simply expanding production to meet that additional demand, Alcoa is still working on improving its cost structure, with plans to make further closures or curtailments of smelting and refining capacity at its higher-cost facilities.

What's clear from Alcoa's results and its subsequent conference call is that the company is making moves in as many directions as it can handle in order to improve results. From the roll-out of its Micromill facilities to the integration of its Firth Rixson acquisition, Alcoa is dealing with the ups and downs of its core customer base by addressing immediate concerns at the same time that it locks in long-term prospects years down the road.

Micromill facilities are helping Alcoa be more competitive. Source: Alcoa.

Nevertheless, traders focused almost entirely on the revenue miss, sending shares down almost 3% shortly before the market opened on Thursday. Even as global macroeconomic concerns continue to cast questions about the strength of demand for commodities more widely, Alcoa is working as hard as it can to refine its business into a well-oiled profit machine.

If other companies are as willing to give their businesses a hard look and consider major changes, then it should bode well for the stock market in the long run.

The article Alcoa's Mixed Results Hide Longer-Term Improvement originally appeared on Fool.com.

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