If Alcoa (AA) is any indication at all of what's to come in this earnings period, then, even though the market has moved up tremendously, even as we hear about a wobbly global economy, this rally may be based on something more than pure low interest rates.
Alcoa doesn't set up its call to tell you about how the world's doing. You have to read between the lines. But let's put it this way: China and Europe have bottomed when it comes to automotive, heavy duty truck and trailer manufacturing, and building and construction.
Do you hear anyone talking like that? But that's what Alcoa's numbers show. The growth in Western Europe is pretty much astounding, frankly. Auto production is rising 6.1% in Western Europe, with registrations increasing 9.9% year to day and exports forecasted to increase 4.8% in 2016, more than double last year. China's auto production is now up 5.2% year to day and 4.2% year over year, driven by SUVs and Crossover demand, which is up 34%.
Trucks? Europe's production is up 9.4% year to day. Registrations for Europe this year are up 18.4% and orders are up 5%. China's incredible: sales up 25% year over year and 14.1% year to date. Production's growing 25%.
Those are extraordinary numbers. CEO Klaus Kleinfeld's talking about improving electrical demand and strong demand in the transport and packaging sectors, as well as stimulus kicking in for building construction.
I sat there listening spellbound and found myself saying "what a short those European bonds are."
The U.S.? Even though we are producing autos at levels thought to be peak, Kleinfeld doesn't see a downturn when you consider that so much of the fleet is now 12 years or older.
Aerospace, which is more than 50% of what will be the more highly valued portion of the company, showed flatness because of destocking. But Kleinfeld predicted a big pickup in the second half and double digit growth in 2017. That would be incredible for Arconic, the new name for the portion of the company that sells into that market.
The commodity side of the business, though, stole the show on last night's call, with basic building blocks bauxite and alumina improving dramatically in pricing. China's running out of Bauxite and Alcoa's the biggest producer of the materials. That's how you get a 22% increase in pricing. The Chinese had been making up for its bauxite deficit by importing from Indonesia and Malaysia, but both countries have banned exports to China to preserve their own stocks and to curb the despoiling of their lands. That leaves bauxite from the country of Guinea and from Alcoa.
I know I had a preconceived bias going into this quarter that the highly valued portion, Arconic, would be the one to own because its aerospace division looks a lot like that of Precision Castparts (PCP) that Berkshire Hathaway (BRK.A) (BRK.B) owned except, according to Kleinfeld, it's taking share from the old PCP. Plus, aluminization of autos continues at a rapid pace, expected to grow 20% for the next five years. Why not? Aluminum is cheaper, lighter and more durable in many cases -- not all, but many -- for the task at hand.
After last night, though, I am thinking the commodity portion could be the one to be in. You have this remarkable call on a turn in aluminum, which may already be happening, and turns in bauxite and alumina that are already happening. The numbers here could be gigantic -- that is, if the Chinese don't buy the company first.
I have championed Alcoa for ages because of the amazing cost cuts and productivity advances, as well as the creation of new uses of a very basic metal. But it's been very tough, because the company's been so hostage to commodity prices. Now it has bought enough value-added businesses in aerospace and invented enough uses for its metals that it would be doing just fine. It will do even better now as two separate companies.
A year from now, when a portfolio manager wants a commodity metals company, she won't reach for Rio Tinto (RIO) , or Vale (VALE) or Freeport-McMoRan (FCX) or BHP Billiton (BHP) , she'll go for the much simpler Alcoa. And when she wants a proprietary materials company? At these prices, she will reach for Arconic.
Hmm, maybe better just to reach for both now when they are still one company and don't reflect these two very different, very positive opportunities.