Monday, April 4, 2011

Alcoa Inc. (NYSE: AA): Q1 Earnings Preview 2011

Alcoa Inc. (NYSE: AA) is scheduled to release its first quarter earnings after the closing bell on Monday, April 11, 2011. Analysts, on average, expect the company to report earnings of $0.27 per share on revenue of $6.32 billion. In the year ago quarter, the company reported earnings of 10 cents per share on revenue of $4.89 billion.

Alcoa Inc. engages in the production and management of primary aluminum, fabricated aluminum, and alumina worldwide. The Company’s products are used worldwide in aircraft, automobiles, commercial transportation, packaging, building and construction, oil and gas, defense, and industrial applications.

In the preceding fourth quarter, the Pittsburgh, Pennsylvania-based company's net income was $258 million, or 24 cents a share, compared to a loss of $277 million, or $0.28 per share, in the year-ago quarter. On an adjusted basis, the company earned $0.19 per share in the fourth quarter. Revenue climbed to $5.7 billion from $5.4 billion in the same quarter last year. Analysts, on average, expected the company to report earnings of $0.19 per share on revenue of $5.68 billion. 

For 2011, the company projects growth in all end markets on a global basis. "In 2011, we see aluminum growing another 12 percent on top of last year's 13-percent improvement." said Klaus Kleinfeld, Alcoa Chairman and CEO. At its last earnings call in January, the company warned that raw material costs will continue to rise. Further, Alcoa said it projects global demand for aluminum to double by 2020.

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. Three-month aluminum on the London Metal Exchange has gained 7.1 percent this year. Historically, the automotive and construction markets have been the largest drivers of metal consumption, more than 50% of the total demand. 

Meanwhile, Chinese demand for aluminum continues to grow at a rapid rate. The growing middle classes of India and South America are also stretching supplies, as construction and the number of individuals driving automobiles is increasing fast. At the same time, aluminum smelters in China are facing a “critical shortage” of power that prevents them from ramping up output in the first quarter of 2011, helping to buoy prices as stockpiles decline further. China curbed power to energy-intensive industries in the final quarter in a bid to meet a yearend carbon-emission target, hurting output of some metals including aluminum. More than 2 million metric tons of aluminum capacity was halted in Guangxi, Guizhou, Henan and Hunan in the drive. 

The company is also likely to benefit from rising copper prices. That's because aluminum is generally accepted as a cheaper substitute to copper in many applications, and many manufacturers are seriously considering switching to aluminum with copper reaching all-time high prices early this year.

Late in January, Alcoa agreed to buy the aerospace fastener business of TransDigm Group Inc. for $240 million in late January. The business, comprising three manufacturing facilities and about 400 staff, will become part of Alcoa Fastening Systems. Alcoa said the deal, to be closed during the first quarter, "is expected to be earnings and cash flow accretive in the first year.

During the quarter in review, Alcoa said that it will contribute up to $600 million in common shares to its benefit pension plans in the first quarter. Alcoa will also make an additional $300 million cash contribution to its plans this year. Also, its board declared a quarterly dividend of 3 cents a share, unchanged from the previous quarter. 

The company's stock currently trades at a forward P/E (fye Dec 31, 2012) of 11.97 and PEG Ratio (5 yr expected) of 0.87. In terms of stock performance, Alcoa shares have gained nearly 20 percent over the past year.

Full Disclosure: None.
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