Alcoa posted third-quarter earnings after Thursday's close that beat Wall Street estimates, while announcing a new dividend and stock buyback. High aluminum prices, helped by Chinese smelting curbs, have transformed the company, which has put debt and pension problems behind it and is getting attention as an ESG play. Following Alcoa's earnings report, AA stock jumped in early Friday.

Wall Street has been eager to hear how Alcoa will use its newfound financial strength spread the wealth through capital returns to shareholders. Along with its Q3 earnings report, Alcoa said a new 10-cent quarterly dividend and a $500-million buyback of AA stock. Alcoa CEO Roy Harvey said the new programs "reflect our confidence in the strength of our company and cash generation ability."

Alcoa Earnings

Alcoa said in mid-September investor presentations that Q3 earnings, before interest, taxes, depreciation and amortization, should exceed Q2's record by about $100 million. That's despite a hit of $25-$30 million from a refinery outage.

Estimates: Analysts expect Alcoa earnings per share to balloon to $1.85 vs. a year-ago loss of $1.17, according to Zacks Investment Research. Revenue is seen growing 24% to $2.94 billion.

Results: Alcoa earnings per share of $2.05 topped estimates by 20 cents. Revenue grew 31.5% to $3.11 billion.

Outlook: Alcoa didn't offer specific earnings guidance but offered some hints. While aluminum and alumina shipment guidance was unchanged, its 2021 bauxite shipment outlook was reduced by 1 million dry metric tons due to a refinery outage. It also noted a potential $90-million impact on Q4 income from higher energy and raw materials costs and a strike.

AA Stock

AA stock jumped 6.5% early Friday. On Thursday, shares edged up 0.4% to 48.60.

Last week, AA stock slipped back to its 10-week and 50-day moving averages around 45.50, before bouncing above the key technical level.

In this case, that test of the 10-week and 50-day lines provided a buy signal, which is still in effect. When that test of the 10-week/50-day line comes above the most recent buy point — 44.52 in the case of AA stock — it offers an actionable entry point for quality stocks.

In this environment, AA stock clearly qualifies. Alcoa stock has a 98 Relative Strength Rating, meaning it has outperformed 98% of all stocks over the past 12 months. Even as Alcoa is still overcoming depressed earnings early in the pandemic, it has a strong 91 IBD Composite Rating, a single score combining both fundamental and technical factors. Record earnings should nudge that higher.

AA stock closed Thursday 4.4% above its 10-week. Investors can consider the buy zone in effect up to 10% above those lines, but should scale back the size of any purchase as a stock rises within the buy zone.

The choppy stock market backdrop offers another reason for caution. Be sure to read IBD's The Big Picture column each day to stay on top of the prevailing market trend and be sure that growth stock investors still have a green light to buy quality stocks in buy range.

Metal Stocks Firming

Copper and steel stocks are among other metal stocks that have begun to show strength after coming under pressure for the past couple of months. Copper play Freeport-McMoRan retook its 50-day line this week amid rebounding prices. The copper miner reports earnings before the open on Oct. 21.

Steel stocks also show signs of a comeback after putting in a floor. Steel Dynamics reports after the close on Monday, while Cleveland-Cliffs reports before Tuesday's open and Nucor reports late Thursday.

Alcoa Outlook

"We're starting to see both some near-term and longer-term supply side constraints," CFO William Oplinger told a Jefferies investor presentation on Sept. 21.

He described China's "getting serious" about restricting aluminum smelting capacity to reduce carbon emissions as "an inflection point."

Oplinger also highlighted Alcoa's plan to relaunch capacity in Brazil that has been out of commission since 2015 as another driver of profitability.

Alcoa has partnered with Rio Tinto in developing "no carbon smelting technology" that could see a commercial launch by 2024.

"If that works, if it scales up, it will be an absolute game changer in our industry. And we and Rio will be the ones that have
that technology."