Alcoa (NYSE: AA) reported strong Q3 earnings that topped expectations, leading share prices to climb 18.4% in the next two trading sessions. Alcoa also increased its dividend and announced an aggressive stock buyback plan.
The company is one of the largest aluminum producers in the U.S. and is always one of the first industrial companies to report earnings, so it's considered a bellwether for the industrial sector and the broader economy.
Inside the Numbers
In Q3, Alcoa posted $2.05 in earnings per share, topping expectations of $1.85 per share. It was also a sharp turn from last year's Q3 loss of $1.17 per share. Revenue also topped expectations and was 31% higher than last year at $2.94 billion.
This was a new record for earnings despite a $25 million loss from a refinery outage. Alcoa didn't issue firm guidance but said that it was feeling some impact from higher energy and raw material costs and maintained its outlook for shipment volumes. Overall, the company continues to benefit from the reduced output from China which has curbed smelting to reduce emissions.
The company is also planning to return cash to shareholders via its $0.10 quarterly dividend and a $500 million buyback program, equating to about 6% of its total stock.
Stock Price Outlook
Like many commodity stocks, Alcoa has performed well following the market bottom in March 2020. This is due to a surge in demand while supply was constrained. YTD, Alcoa's stock is up 158%. And, this momentum has continued this month with a nearly 30% gain. Despite these returns, Alcoa's stock remains quite cheap with a forward P/E of 9 which is significantly less than the S&P 500's (NYSE: SPY) forward P/E of 21.
Its recent quarter showed that the company is experiencing a surge in growth. Based on its multiples, the market is treating it as a temporary increase that won't last. However, there are reasons to believe that aluminum demand will remain strong with increased infrastructure spending across the world, the need for more housing in the U.S., and a continued recovery in the industrial sector.