Arconic’s Q4 2016 Earnings Preview: Near-Term Headwinds In Key End Markets To Weigh On Results

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Arconic Inc., which primarily represents the value-added businesses of the undivided Alcoa Inc. post the split of the company’s business into two standalone companies, is set to report its fourth quarter earnings on January 31. [1] This earnings release will be Arconic’s first as a standalone company. We will be looking out for the company’s 2016 10-K in order to build our own model for its stock price. In this article, we will outline the major factors likely to impact the company’s results in Q4.

Arconic supplies a range of light metal engineered products to a range of end markets, with aerospace, commercial transportation, and automotive the prominent ones among them. Thus, the demand for Arconic’s products is dependent on demand conditions facing these end markets. While these sectors are expected to be characterized by strong demand conditions going forward, near term demand weakness is likely to weigh on Arconic’s Q4 results. The aerospace segment is characterized by solid long-term demand conditions, with commercial jet order books standing at nine years worth of production. [2] However, adjustments made to their delivery schedules by airline manufacturers in the latter half of 2016 are expected to negatively impact Arconic’s aerospace revenues in Q4 2016. [3] In addition, weak market conditions in the North American trucking industry are likely to adversely impact Arconic’s revenues from the commercial transportation end market. Excess capacity in the trucking industry has adversely impacted the demand for heavy-duty trucks, which is likely to be reflected in Arconic’s Q4 results. [4] Though a steady growth in light-duty truck sales is expected to positively impact Arconic’s automotive revenues, near term headwinds in the aerospace and commercial transportation end markets are expected to weigh on the company’s top line in Q4.

Given that top line growth is expected to remain subdued, Arconic’s productivity improvement initiatives will play an important role in propping up the company’s bottom line. The company has generated savings from rationalizing procurement and overhead costs as well as improving the efficiency of its production processes. [2] These savings will boost Arconic’s results in Q4 as well.

ARNC Q4 2016 Pre-Earnings

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Alcoa

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Notes:
  1. Arconic to Host Webcast and Announce Fourth Quarter 2016 and Full Year 2016 Results, Arconic News Release []
  2. Alcoa’s Q3 2016 Earnings Presentation, Arconic Website [] []
  3. Alcoa’s Q3 2016 Earnings Call Transcript, Seeking Alpha []
  4. Trucking Industry Faces Weak Freight Demand into 2017, Trucks.com []
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