To The Moon

$Alcoa(AA)$ is scheduled to announce Q4 earnings results on Wednesday, January 17th, after market close. The consensus EPS Estimate is -$0.91 (-30.0% Y/Y) and the consensus Revenue Estimate is $2.57B (-3.4% Y/Y). Over the last 2 years, AA has beaten EPS estimates 50% of the time and has beaten revenue estimates 38% of the time.

Alcoa's most pressing challenge has been the step-function reduction in margins for its bauxite and alumina assets which has been hit by a combination of higher energy costs and permitting challenges, resulting in lower grade bauxite ore to be utilized through 2027.

With a list of underperforming assets that knocked $90M from EBITDA last quarter, Alcoa would likely need to take more decisive action to fix or close assets in 2024, which could impair near-term free cash flow on restructuring.

Alcoa (AA) Upcoming Earnings Guidance

AA has issued earnings guidance for Q4 2023. EPS estimate in the range of-0.28 to -0.22.

Alcoa (AA) Latest Technical - Dead Cat Bounce

Alcoa lost 7.8% on 16 Jan (Tuesday) after UBS initiated coverage with a Sell rating with a $29 price target. They are believing that Alcoa’s mid-cycle earnings power has been significantly reduced due to company-specific challenges as well as structural shifts in the market.

From the technical, it looks like AA did try to bounce back on 12 Jan (Friday), but it has failed and continue its decline.

Alcoa (AA) Last Reported Earnings

AA last reported earnings on 18 Dec 2023 after the market close (AMC). and its shares gained +6.2% the day following the earnings announcement to close at 32.42. Following its earnings release, 29 days ago, AA stock has drifted +15.5% higher.

From the time it announced earnings, AA traded in a range between 22.97 and 35.04. The last price (27.87) is closer to the lower end of range.

Alcoa (AA) Historical Moves Ahead of Earnings

AA stock had mixed performance leading up to earnings. Shares of Alcoa Common traded lower, on average, in the one week, three day, two day, and one day periods heading into an earnings report. The best performance was two weeks ahead of earnings for an average gain of 0.8%

Alcoa (AA) Historical Stock Price Reaction to Earnings

AA shares have moved lower in the immediate aftermath of earnings 7 out of 12 previous reports. On average the stock moved down -2.4% in the first day of trading after the company reported earnings.

Alcoa (AA) Stock Behavior After Earnings

Based on the previous 12 earnings releases, AA is more likely to trade lower 1 day after earnings for an average loss of -1.1%

Alcoa (AA) Common Post Earnings Announcement Drift

AA share price has drifted up 15.5% post earnings announcement. Using the last 12 quarters data, the average drift between earnings announcements is 14.9%. The current drift represents a positive 0.4 standard deviation move.

• Current post earnings announcement drift: 15.5%

• Historical average post earnings announcement drift: 14.9%

• Historical post earnings drift standard deviation move: ±39.1%

Alcoa (AA) Post Earnings Movement

The options market overestimated AA stocks earnings move 50% of the time in the last 12 quarters. The predicted move after earnings announcement was ±7.0% on average vs an average of the actual earnings moves of 7.4% (in absolute terms).

This shows you that AA tended to be more volatile than the options market predicted for the earnings stock price reaction.

Alcoa (AA) Earnings Implied Volatility Crush

AA's last earnings implied volatility (IV30) going into earnings was 56.3. The last time AA released earnings, the implied volatility dropped to 50.2, resulting in an implied vol crush of 11%. 5 days after earnings, the 30 day IV was 51.6.

• Average Implied Volatility Crush For AA Earnings: 10%

• Average 30 Day Implied Volatility 1 Day Before Earnings: 59.2

• Average AA 30 Day IV for the Day of Earnings: 53.6

• Average 30 Day Implied Volatility 5 Days After Earnings: 55.2

Alcoa (AA) IV Percentile Rank

AA implied volatility (IV) is 57.3, which is in the 89% percentile rank. This means that 89% of the time the IV was lower in the last year than the current level. The current IV (57.3) is 0.3% above its 20 day moving average (57.1) indicating implied volatility is trending higher.

Alcoa (AA) IV vs 20-Day HV

The current IV (57.3) in AA is 4.7% above its 20 day HV (54.7) suggesting that options markets are predicting future volatility to trade above the most recent 20 day realized volatility.

Alcoa (AA) Volatility Skew

The implied volatility skew shows the market's bias for pricing in volatility risk to the option premium of downside puts and upside calls.

The implied volatility for downside puts is increasing relative to upside calls, this suggests the market is pricing in a larger fear to a downside move.

Alcoa (AA) Option Valuation and Implied Move

With option valuation in overvalued, Alcoa could faced some more decline due to the challenges it is currently facing, and with the implied move at 7.70%, the most recent one with actual move declined by -7.2%.

This would mean that Alcoa is expected to decline after its earnings.

Summary

Alcoa would be affected by the medium-term aluminum price trends given demand weakness likely will continue into 2024, and expect foreign exchange and cost curve deflation also will limit price upside.

These factor could affect the price of their underperforming assets and mining lower quality bauxite will result in higher energy and caustic usage, limiting gross tonnage that can be refined.

Appreciate if you could share your thoughts in the comment section whether you think Alcoa would be coming up with more decision action to reduce costs and improve its assets standings?

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.