Saturday, April 3, 2010

Alcoa Inc. (NYSE: AA): Q1 Earnings Preview 2010

Alcoa Inc., the largest US aluminum maker, will officially kick off the Q12010 earnings season after the market close on Monday, April 12, 2010. Analysts, on average, are looking for earnings of $.15 per share in the first quarter with estimates ranging between $0.06 and $0.27 per share. Revenues for the quarter are estimated to be $5.32 billion. In the Q12009, Alcoa reported a loss of 59 cents on revenue of $4.15 billion.

Alcoa is considered as a bellwether for investor sentiment toward the economy. The company is the world's third largest producer of primary aluminum with an annual capacity of 4.8 million metric tons per year (mtpy). It involves in the technology, mining, refining, smelting, fabricating, and recycling of aluminum. The company reported a net loss of $1.15 billion or $1.23 per share in fiscal 2009 as it was hit hard by soft demand from the automotive, construction and aerospace industries in light of the economic downturn. The company cut thousands of jobs, reduced output, slashed its dividend, trimmed spending and raised $1.3 billion through common stock and convertible notes offerings to cope with the situation.

In the preceding Q42009, the Pittsburgh, Pennsylvania-based company reported earnings of $277 million or $0.28 per share, compared to a net loss of $1.19 billion or $1.49 per share for the year-ago quarter. On an adjusted basis, the company earned 5 cents a share. Revenue fell 4.5% to $5.43 billion from $5.69 billion in the same quarter last year. Analysts, on average, expected the company to earn $0.06 per share on revenue of $4.82 billion.

Aluminum prices, which slumped early last year has recovered amid increased economic optimism and investor appetite for riskier assets. Prices have also got a boost from weaker dollar, recovery in housing market, stabilization in auto industry, consumer restocking and Chinese buying also supported prices. In the past 12 months, aluminum prices have jumped 54 percent in London. Historically, the automotive and construction markets have been the largest drivers of metal consumption, more than 50% of the total demand. Large automakers like Ford and Toyota have reported sharp jump in their US car sales in recent months. In January, Alcoa forecast that global demand for the metal will increase 10 percent this year.

The company generated free cash flow of $761 million in the fourth Q42009 and finished cash flow positive for the first time since Q22008. The company ended the Q42009 with $1.5 billion of cash on hand. The company's debt-to-capital ratio stood at 38.6% at the end of the quarter, a 390 basis point improvement from a year ago.

In recent quarters, Alcoa's performance has been negatively impacted by a spike in energy costs and dollar’s decline against the euro and the Brazilian real. Energy costs represent nearly 65% of Alcoa's refining costs and 70% of its smelting costs.

The U.S. aluminum giant recently announced that it has expanded its aluminum can recycling capacity at its Tennessee operations by investing $24 million. This expansion would ramp up Alcoa’s recycling capacity by about 50% from the current capacity of 54%. The expansion is in line with the company’s aim to expand its aluminum can recycling capacity to 75% by 2015 in North America. Alcoa believes that the recycling of these cans would help aluminum producers to reduce their power consumption by 95%. A higher amount of energy is required to make aluminum cans from raw aluminum compared to recycling the same.

In terms of stock performance, Alcoa shares have lost 10 percent since the beginning of the year.

Full Disclosure: None.
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