Alcoa Surpasses Expectations, But the Stock Is Still One to Avoid
Shares of Alcoa (AA) - Get Report jumped Monday after the company reported second-quarter results that surpassed Wall Street's expectations but fell from a year earlier.
But, despite beating estimates and management's optimism about the future, investors should avoid the stock because there are many smarter and safer ways to reap profits.
The metal manufacturer posted earnings of $135 million, or 9 cents a share, down from $140 million, or 10 cents a share, a year earlier. Revenue fell 10% from a year earlier to $5.3 billion, above the $5.23 billion expected by analysts.
The price that Alcoa got for aluminum fell 15% from a year earlier, and management noted that when prices rebound, the smelting business will see a massive profit jump due to cost-cutting measures at the company over the past few years.
However, that assumes that aluminum prices will rebound from around $1,652 a ton.
Morningstar analyst Andrew Lane expects aluminum prices to fall to $1,440 a ton by 2020.
In addition, Alcoa said recently that it will split the company into two units later this year.
One will be the mining, energy and smelting assets, while the other will make and sell specialty lightweight products used in aerospace, auto and other industries.
The latter business will be called Arconic, and it posted a second-quarter 3% gain in operating income, though growth slowed because the aerospace industry showed weaker demand.
From an investing standpoint, the Arconic business would be the only one to consider buying. But though some of the details have been laid out about what assets, liabilities and cash will go with each unit, buying shares of Alcoa now just to receive some Arconic shares later doesn't yet make sense.
Those who are just waiting for the split and need a place to park their cash, should instead consider the iShares S&P 500 Exchange-Traded Fund (IVV) - Get Report or the SPDR S&P 500 ETF (SPY) - Get Report . With the Dow Jones Industrial Average and the S&P 500 both hitting all-time highs, investing in the market as a whole can help investors avoid single-stock risk.
Regardless off whether an investor wants to own the market or single stocks, however, Alcoa should be off the table at this time, but leave it on the watch list because once the split happens, Arconic may be worth owning.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.