Arconic (ARNC) Q1 Earnings Preview: What's In The Offing?

Arconic Inc. (NYSE:ARNC) is slated to release its first-quarter 2018 results before the bell on Apr 30.

Arconic’s adjusted earnings of 31 cents per share for the fourth quarter of 2017 topped the Zacks Consensus Estimate of 24 cents, translating into a 29.2% positive surprise.

Revenues rose around 10% year over year to $3,271 million in the quarter, driven by improved volumes across all segments and higher aluminum prices. Sales also beat Zacks Consensus Estimate of $3,070.5 million.

Arconic has underperformed the industry it belongs to over the past six months. The company's shares have declined around 10% over this period, compared with roughly 9.3% gain recorded by the industry. Its shares were hit hard following the release of the fourth-quarter results on its downbeat earnings and cash flow guidance for 2018.

Let’s see how things are shaping up for this announcement.

Factors at Play

Arconic, in its fourth-quarter call, said that it expects revenues for 2018 in the range of $13.4-$13.7 billion. It also expects adjusted earnings in the range of $1.45-$1.55 per share and free cash flow to be around $500 million. Arconic also initiated portfolio and strategy review, which is expected to be completed by the end of this year.

The Zacks Consensus Estimate for revenues for Arconic for the first quarter stands at $3,330 million, reflecting a year over year growth of 4.1%.

Arconic is focusing on cost reduction and productivity improvements across its businesses, which should lend support to its bottom line. The company achieved net cost saving of 2.1% of revenues in the last reported quarter and is expected to continue to benefit from its cost actions in the March quarter.

Arconic is also seeing strong momentum in automotive, driven by the transition of the auto industry to lightweighting. The company saw a 22% growth in the automotive end-market in 2017 and expects 15-20% growth this year.

Moreover, Arconic is witnessing healthy demand trends in the aerospace market and is actively pursuing its aerospace expansion strategy. It is well placed to gain from major contract wins in aerospace. Arconic is witnessing strong momentum in commercial aero engines with sales rising 8% year over year in 2017. The momentum in aerospace is expected to continue in the first quarter. The company sees a 4-6% growth in aerospace and defense end-market in 2018, higher than 2% in 2017.

However, Arconic is exposed to headwind from charges associated with higher aluminum prices, driven by LIFO (last-in, first-out) method of inventory accounting, increased processing costs and metal lag. Higher aluminum prices led to a negative impact of $42 million in the fourth quarter and $84 million for full-year 2017 on its EBITDA margin and may pose some headwinds in the March quarter.

Arconic is also seeing weak sales in industrial gas turbine market due to soft market conditions. The market was down 7% in 2017 and the company expects at least 40% decline in 2018. The company also expects pricing pressure to continue in many of its markets, especially aerospace, and also sees higher raw material prices in 2018.

Earnings Whispers

Our proven model does not conclusively show that Arconic is likely to beat the Zacks Consensus Estimate this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below:

Zacks ESP: The Earnings ESP for Arconic is 0.00% as both the Most Accurate Estimate and the Zacks Consensus Estimate are pegged at 32 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Arconic currently carries a Zacks Rank #3, which when combined with a 0.00% ESP, makes surprise prediction difficult.

Note that we caution against Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks Poised to Beat Estimates

Here are some companies in the basic materials space you may want to consider as our model shows they too have the right combination of elements to post an earnings beat this quarter:

WestRock Company (NYSE:WRK) has an Earnings ESP of +2.32% and flaunts a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Univar Inc. (NYSE:UNVR) has an Earnings ESP of +2.63% and sports a Zacks Rank #1.

FMC Corporation (NYSE:FMC) has an Earnings ESP of +1.43% and carries a Zacks Rank #2.

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