Earnings season officially kicks off this afternoon, as aluminum specialist Alcoa reports first-quarter earnings. The company was a key part of the Dow Jones Industrials for more than five decades, reigning over one of the largest industrial growth periods in the nation's history during the second half of the 20th century. Yet even though Alcoa has shrunk to mid-cap status and was dropped from the Dow in 2013, investors still see the company's quarterly reports as kicking off each earnings season. This quarter in particular, Alcoa's results will be important as a barometer of how companies facing difficult conditions in the commodity industry can navigate through financial challenges to emerge stronger than ever.
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What Alcoa has enduredAlcoa's struggles mirror the conditions facing many commodity-based companies. During the global economic boom, demand for aluminum for construction and infrastructure uses skyrocketed, and that spurred massive production-capacity increases in the aluminum industry. That was fine until growth slowed in emerging-market economies such as China, leading to a collapse in demand and a glut of aluminum supply that drove down prices. Even as the rest of the U.S. economy fared reasonably well, Alcoa's exposure to global economic conditions held it back.
Investors now see the same trends throughout the energy and commodities sectors. The plunge in precious metals prices hurt gold and silver miners, and producers of other base metals have struggled amid falling prices. Energy stocks have become the latest casualty, as a glut of crude oil sent prices reeling and challenged business models throughout the industry.
Why Alcoa is getting strongerStill, investors in commodity stocks can take some solace from Alcoa's experience. Since being dropped from the Dow, Alcoa has taken a number of positive steps that have helped its share price bounce back sharply. Strategic moves made to cut back on production have helped it emphasize its lowest-cost operations, improving its commodity business. At the same time, Alcoa has focused on the areas where it can add the most value, producing high-end fabricated materials built to customer specifications for highly individualized purposes.
In addition, Alcoa has gone beyond simply selling aluminum. As a leading supplier for the aerospace industry, Alcoa has looked to include other lightweight materials in its products, particularly titanium. Earlier this year, Alcoa agreed to buy titanium specialist RTI International for $1.3 billion, adding to previous acquisitions to boost its capacity to serve aerospace customers.
Investors have high hopes for Alcoa, with expectations that earnings per share will nearly triple from the year-ago level and that modest sales growth will continue. If Alcoa meets or exceeds those expectations, then it could prove to commodity investors that cyclical forces in the industry remain intact and that most of the hardest-hit stocks in their respective sectors will also rebound eventually. With investors bracing for the first drop in overall market earnings in years, the hint of a light at the end of the tunnel might be just the thing to keep optimism alive.
The article Why Alcoa is Still Important This Earnings Season originally appeared on Fool.com.
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