Earnings Preview: Alcoa (AA)

The largest U.S. aluminum producer, Alcoa Inc. (AA) announced that it would release its results for the third quarter of 2011 after the market closes on October 11, 2011.

Alcoa had kicked off the second quarter earnings season with an EPS of 32 cents and missing the Zacks Consensus Estimate of 34 cents.

With respect to earnings surprises, the company outdid the Zacks Consensus Estimate in the trailing three quarters and was behind the Zacks Consensus Estimate in the second quarter of 2011. This is reflected in the average earnings surprise of 14.59%, with positive surprises in three quarters and negative in one.

Second Quarter Review

Revenues for the quarter were up 27% year over year to $6.585 billion, outpacing the Zacks Consensus Estimate of $6.434 billion. The increase was due in part to higher alumina shipments, and higher realized pricing for both alumina and aluminum.

The company posted improved profits across all its segments. This was followed by revenue growth of 13% in packaging, 6% in aerospace, 12% in building and construction, 16% in commercial transportation, 9% in industrial products, 8% in industrial gas turbines and 5% in automotive.

The company’s adjusted EBITDA of $1.04 billion was up 44% year over year.

Alumina– The shipments in the reported quarter increased 11.8% year over year to 2.4 million metric tons on the production of 4.1 million metric tons. In the reported quarter, the price of alumina jumped 7%. However, the improvement in price was partially offset by higher raw material and energy costs as well as a negative currency impact.

Primary Metals– Shipments in the second quarter of 2011 amounted to 0.7 million metric tons, almost flat compared to the previous-year quarter. During the second quarter, improved realized pricing and profits from restarts at Massena, NY, and Intalco and Wenatchee, WA, were offset by higher energy and raw material costs, as well as a negative currency impact. Production increased by 5% year over year to 0.9 million metric tons.

Flat-Rolled Products – Shipments in the quarter jumped 24.8% year over year to 0.4 million metric tons. Besides, third-party volumes were up 41% in Russia and 30% in China compared with the second quarter of 2010.

Engineered Products and Solutions – Shipments in the quarter surged 23.9% year over year to 0.57 million metric tons. The segment’s strong results were marked by new product developments and productivity improvements.

At the end of June 30, 2011, cash from operations was $798 million versus $300 million in the year-ago quarter. Free cash flow was $526 million versus $87 million in the prior-year quarter. Debt-to-capital ratio was 32.6% and cash on hand was $1.3 billion. Days working capital were reduced to 37 from 43 in 2Q10.

Agreement of Estimate Revisions

Eight out of the 11 analysts covering the stock for the third quarter of fiscal 2011 have made a downward revision in the last 30 days and 5 amongst them have made a downward revision in the last 7 days. None of the analysts have made any upward revision in the last 30 days.

Magnitude of Estimate Revisions

The third quarter 2011 estimate was 30 cents per share in the last 30 days and decreased by 2 cents to 28 cents per share in the last 7 days. It dropped again by 5 cents to 23 cents per share currently. The Zacks Consensus Estimate for the third quarter is 156.57% higher than the year-ago quarter.

Our Take

Alcoa Inc., a Pennsylvania-based corporation, is among the world’s leading producers of primary and fabricated aluminum and alumina. It involves the technology of mining, refining, smelting, fabricating and recycling of aluminum. We believe that Alcoa’s cost reduction efforts are to some extent, offsetting the negative impact of higher energy and raw material costs on profitability.

Alcoa expects aluminum to remain in great demand for the rest of 2011, due to the metal’s unique properties of lightness, strength and reusability. Alcoa reaffirmed its forecast of a 12% growth in global aluminum demand in 2011.

Looking ahead, Alcoa projects continued growth in all major end-markets across the globe, including aerospace (7%), automotive (4-8%), commercial transportation (7-12%), packaging (2-3%), building and construction (1-3%), and industrial gas turbines (5-10%).

For the year, Alcoa projects aluminum demand to grow 12% on top of the 13% growth witnessed in 2010. Alcoa projects that from the 2010 baseline, aluminum demand would double by 2020 on a 6.5% annual growth.

Currently, Alcoa has a short-term (1 to 3 months) Zacks #3 Hold rating and a long-term (6 months) Neutral recommendation.

Alcoa faces stiff competition from Aluminum Corporation Of China Limited (ACH), Rio Tinto Plc. (RIO) and BHP Billiton Ltd. (BHP).

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