Earnings Preview: Alcoa Inc.

Alcoa Inc. (AA), the U.S. aluminum giant, is scheduled to report its third-quarter 2010 results after the markets close today. For the quarter, analysts are looking for net earnings of 6 cents per share versus last year’s 4 cents. The full year 2010 estimate is pegged at 45 cents.

Alcoa has reported mixed results in the past few quarters. The company has reported losses from the last quarter of 2008 until the second quarter of 2009, affected by the economic turmoil. The third quarter of 2009 was a turnaround, with Alcoa reverting to profitability on improving operating conditions.

Although the company has reversed losses, earnings remain weak. Despite a better-than-expected second quarter in 2010, Alcoa’s share prices declined considerably since the beginning of the year (from $16 to $12) on concerns over aluminum prices and a slower recovery in end markets.

Second Quarter 2010 Highlights

Alcoa reported second quarter 2010 net earnings of $136 million or 13 cents per share, in contrast to a year-over-year loss of $312 million or 32 cents per share and a sequential loss of $194 million or 19 cents per share. Reported earnings outperformed the Zacks Consensus Estimate of 12 cents.

Alcoa’s higher-than-expected earnings were driven by stronger volumes, productivity improvements, favorable currency and lower energy costs, which more than offset the negative impact of a sequential decline in aluminum prices. Average realized aluminum prices were down $22 per ton to $2,309 per ton in the quarter. However, aluminum prices soared 38% year over year.

Quarterly revenues of $5.2 billion were up 22% year over year and 6% sequentially. Alcoa witnessed higher revenues in several end markets, particularly packaging, commercial transportation, building and construction, industrial gas turbines and aerospace.

Zacks Consensus Estimates

Analysts have remained skeptical about Alcoa’s prospects. Over the last month, 6 out of the 15 analysts covering the stock made negative revisions to their estimates for the upcoming quarter on the back of overall weak aluminum demand and softening prices, while only 3 analysts made positive revisions. Analysts remain wary of the downtrend in the aluminum prices which move in tandem with the London Metal Exchange. The overall Zacks Consensus Estimate fell by a penny during the period.

We see a similar trend for the full year, with 7 analysts out of the 16 covering the stock downgrading their estimates and 3 upgrading estimates over the last 30 days. The Zacks Consensus Estimate fell 2 cents for the full year.

Over the last 7 days, out of the 15 analysts covering the stock, 1 upped his or her earnings estimate while 1 downwardly revised for the third quarter of 2010. There are 2 negative estimate revisions and 1 positive revision for the full year over the last week.

With respect to earnings surprises, Alcoa has missed the Zacks Consensus Estimate in two of the last four quarters while it topped the Consensus Estimate in the other two. This is reflected in the average surprise of 14.03%.

Neutral on Alcoa

We upgraded Alcoa Inc. to Neutral from our previous Underperform recommendation after better-than-expected results in the second quarter of 2010. Our short-term recommendation is also Neutral, as indicated by the Zacks #3 Rank.

Alcoa’s downstream business volume has picked up with improving demand from end-markets, particularly in the aerospace, commercial vehicle and non-residential construction markets. The company is also acquiring downstream assets in developing markets. It currently generates about $1 billion in revenues from the Chinese market. It has recently started a flat-rolled product facility in Borhai, China, to serve the Chinese domestic lithographic, transportation, electronic and packaging markets. In Russia, Alcoa has commissioned the high-quality coated sheet line in the Samara facility to serve the packaging market. Alcoa is the only domestic can sheet producer in Russia.

Alcoa continues to benefit from its cost saving efforts. We believe the cost cuts will make the company more competitive once markets recover fully. Higher downstream volumes inspire further optimism about its top-line growth.

However, Alcoa is subject to cyclical fluctuations in London Metal Exchange prices, general economic conditions and aluminum end-use markets. If there is any significant decline in aluminum prices in 2010, Alcoa is likely to underperform. If the global economy worsens, demand for aluminum and aluminum-based products would also likely slow, thereby pulling down Alcoa’s shipments and revenues. The company also battles higher input costs and significant restructuring charges, which pressure margins.

ALCOA INC (AA): Free Stock Analysis Report

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