Tesla and Dow manage inflation. Alcoa shows that it is not easy.

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The cost of caustic soda, essential to the aluminum production process, is expected to rise, according to Alcoa.

The time of dreams

Inflation is at over 40-year highs, creating a host of problems for businesses and consumers. Managing through this proves easier for some than for others.

Take an aluminum fabricator


Alcoa

(symbol: AA). Its shares fell 16.9% on Thursday. the


S&P500

and


Dow Jones Industrial Average

fell 1.5% and 1.1%, respectively.

The decline in equities


Alcoa

was partly due to its earnings report, released after markets closed on Wednesday. The company reported earnings per share of $3.06 on $3.3 billion in sales, while Wall Street was looking for $2.88 on $3.5 billion. That doesn’t seem like enough for a double-digit loss for the stock, but some points seem to have worried investors.

For starters, Citigroup analyst Alexander Hacking downgraded the stock to Hold from Buy. Its price target remained at $84 per share. The shares are still up about 27% year-to-date and he calls the stock “fairly valued.”

There are also cost pressures that could eat into profit margins in the second half of 2022. Management said on its earnings conference call that prices for caustic soda, an ingredient in Alcoa’s manufacturing process, are rising. after a while and will be higher. by the end of the year. There is not much Alcoa can do about this as there is no good substitute for caustic soda in aluminum fabrication.


Dow Inc.

(DOW) also faced rising costs, but it had more ability to substitute raw materials, helping the company better manage the inflation problem. Chief Financial Officer Howard Ungerleider said barrons that about 65% of the company’s production capacity can switch between oil- or natural-gas-based feedstocks. This was valuable as oil prices rose in the first quarter.

The oil-to-natural gas ratio, a gauge of which commodity is cheaper, averaged about 19 in the first quarter, meaning a barrel of crude costs 19 times more than 1,000 cubic feet of gas. This figure is about 20% higher than in the fourth quarter, which means that oil is becoming more expensive compared to natural gas, and that


Dow

would likely favor manufacturing petrochemicals from natural gas feedstock to preserve margins.

Its first-quarter revenue and profit, released Thursday morning, were better than expected. The stock rose 2.9% on Thursday.

Same


You’re here

(TSLA) entered the substitute match. Like Dow and Alcoa, it beat forecasts on the top and bottom of its first-quarter results, released Wednesday night. The stock rose 3.2% on Thursday.

Management spoke of inflation when discussing the result, but managed to offset the pressure by changing the composition of their batteries, among other tactics. Tesla said about half of cars shipped in the first quarter used lithium-iron-phosphate, or LFP, batteries that don’t contain expensive cobalt and nickel.

LFP batteries have less energy in a cell than more expensive ones, but buyers seem happy with standard-range Tesla models that offer more than 260 miles per charge.

Many automakers are adopting LFP batteries in some of their electric vehicle models as they seek to cut costs. Cobalt and nickel were up around 50% and 20%, respectively, in the first quarter compared to the end of 2021. Iron prices were up more than 10%.

The magnitude of the change isn’t all that matters: Cobalt costs around $80,000 per metric ton, while iron is closer to $1,000.

Businesses will face inflation for many months. For now, investors are rewarding companies that show flexibility.

Write to Al Root at [email protected]

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