The Quarter That Was
Alcoa had a respectable fourth-quarter performance. Sales growth was not exactly robust, as the company produced sequential growth of 7% and annual growth of 4%, but it was good enough to more or less meet the average estimate. Within the numbers there was a relatively normal level of choppiness - Engineered Solutions revenue rose by 11%, while Alumina and Flat-Rolled were laggards with flat revenue and 1% growth, respectively.
To a certain extent, that sales profile worked in the company's favor. Although it is certainly the case that sales performance (both absolute and relative) impacts margins, the company saw the best top-line growth in its highest-margin segments. That helped fuel overall after-tax operating income growth of 14% on a sequential basis and 65% on a year-over-year basis, with Primary Metals leading on both an absolute and relative basis. (For more, see Zooming In On Operating Income.)
Trying to put that into a little more context, the profitability of Alcoa is still a good news / bad news proposition. Looking back through Alcoa's history and trying to craft a "normalized" run-rate, it looks like Alcoa is about 10% below normal in terms of flat-rolled production and maybe 20% below normal in engineered products. Here is why that really matters - the incremental costs involved in those two production profiles are quite small and Alcoa could probably double its profitability in each segment at a "normal" run rate. In other words, there is major positive profit leverage if Alcoa can get back to normal (without a major collapse in prices). (For more, see Alcoa Predicts Aluminum Boom.)
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