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When Alcoa Inc. (NYSE: AA) kicked off earnings season on Monday by soundly beating analysts' expectations, it flashed positive signals for the company and, more importantly, the entire global economic recovery.
The aluminum giant swung from a loss of $0.26 in the same quarter last year to a gain of $0.13 per share, exceeding by 18% the 11-cent average estimate of 17 analysts surveyed by Bloomberg News.
"It's a very positive signal for economic growth and the stock market generally," John Stephenson, who helps manage $1.6 billion including Alcoa shares at First Asset Investment Management in Toronto, told Bloomberg. "Maybe end-use demand has not been destroyed. That's a very good sign and a great way to start off this Q2 earnings season."
Alcoa's earnings aren't important just because they're first to report. As an aluminum producer, Alcoa's customers come from a wide range of industries, giving it an inside line on whether those industries are expanding or contracting.
Looking forward, Alcoa said it sees strength in the aerospace, automotive, gas turbine and building construction sectors. The company raised its global aluminum consumption forecast to 12% growth this year, compared with a previous forecast of 10%.
"Alcoa is now saying they are seeing faster demand growth and this is good," Charles Bradford, a partner at New York- based consulting firm Affiliated Research Group LLC, told Bloomberg. "I would have liked to see them post an even better number, but the industry is still very depressed."
Alcoa's positive earnings surprise was seconded by CSX Corp. (NYSE: CSX), the third-largest rail shipper in the nation, when it reported Monday that its second-quarter profit surged by 36% over a year ago to $1.07 a share. Analysts had been looking for 96 cents per share.
Overall revenue leapt 169% over last year and CSX reported that merchandise traffic rose 14%, automotive traffic rose 63%, metal rose 44%, chemical rose 10% and coal rose 7%.
Like Alcoa, CSX is seen as an economic bellwether simply because more goods get shipped around the country when economic activity is humming along.
The reports sparked a stock market rally on Wall Street yesterday (Tuesday) as the Dow Jones Industrial Average surged upwards 146.75 points to 10,363.02. The Standard & Poor's 500 average rose by 16.52 to 1,095.27 and the NASDAQ composite added 43.67 to close at 2,242.03.
The rally has rocketed the major averages up about 7% since they hit bottom on July 2. The current six-day winning streak is the longest since April.
Alcoa expects aluminum sales for automotive uses to increase by 3% to 8% this year, while sales for commercial trucks and trailers may gain 12% to 17%.
"Global production is expected to rise to around 66 million vehicles, that's a plus 15%. The growth is pretty much in every region except in Europe," Alcoa Chief Executive Officer Klaus Kleinfeld told The Wall Street Journal.
Kleinfeld added that demand for scrap metal, widely seen as another economic barometer, is also strong.
"We continue to see that scrap is very tight, and that continues to also drive primary metal demand," he said.
Alcoa is on the road back and sees indications of a recovery in almost all markets this year including the increasingly important Chinese market, Kleinfeld said.
"I continue to be optimistic on China and believe that we are managing very well through some of the overheating that happened in some of the markets and you see in all markets they are now going to the next phase and restructuring the market to the aluminum market to become more efficient and to become more power conscious," Kleinfeld said.
Alcoa's results were even more impressive considering overall aluminum prices are down and energy prices are up, narrowing the company's margins. In the face of shrinking operating margins, the company's strong performance can be attributed to cost efficiencies and strong volumes.
Aluminum prices have fallen 14% since March 31 and more than 40% from the July 2008 high, before the global recession cut demand.
After prices fell and inventories rose, Kleinfeld idled 20% of Alcoa's aluminum-smelting capacity. The company has lowered procurement costs by $1.4 billion so far this year, and eliminated another $311 million of overhead costs, Kleinfeld said on the call.
"We are really working very hard to fire on all cylinders," Kleinfeld said. "Undoubtedly we are not seeing the environment we've seen in the past but we see the environment getting better and continuously moving in the right direction."
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