Alcoa Inc. (AA)’s Solid Earnings to Be Short-lived

Based on these calculations, it is pretty obvious that Alcoa’s gross profit margin is inversely proportional to oil prices (i.e. the higher the oil prices, the lower the margin is going to be in the coming quarters). With Brent Crude and WTI moving higher in Q1 so far and a likely breakout from the current trading range with rising inflation and economic activity, I expect Alcoa’s margins to erode starting with its next earnings report.

Alcoa’s cost cutting initiative is going according to plan.  Shipments from the $10 billion Saudi Arabian facility, the business’s most cost efficient plant, began in Q4.  2013 is expected to be better on a rise in demand from China by 11% due to better performance from the local heavy vehicles construction segment. Moreover, the rise of the commercial building and construction industries in the US could increase aluminum’s demand by 7%. The demand in the aerospace segment, the strongest performing unit of the company, is also expected to increase by 10%. Pushing out overhead will help offset rising energy prices, but I still expect margins to be squeezed in 2013 as end users will be reluctant to bid prices higher.

The article Alcoa’s Solid Earnings to Be Short-lived originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.