Tuesday, July 5, 2011

Alcoa Inc. (NYSE: AA): Q2 Earnings Preview 2011

Alcoa Inc. (NYSE: AA) is scheduled to release its first quarter earnings after the closing bell on Monday, July 11, 2011. Analysts, on average, expect the company to report earnings of 35 cents per share on revenue of $6.32 billion. In the year ago quarter, the company reported earnings of 13 cents per share on revenue of $5.19 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 $308 million or 27 cents per share, compared to a net loss of $201 million, or 20 cents per share, in the year-ago quarter. On an adjusted basis, the company earned 28 cents per share in the first quarter. Revenue rose 22% to $5.96 billion from $4.89 billion in the same quarter last year.. Analysts, on average, expected the company to report earnings of $0.27 per share on revenue of $6.32 billion. 

At its last earnings call in April, the company said that it is well on track to meet its 2011 financial targets, with debt-to-capital ratio improving to 33.6%. For 2011, the company projects growth in all end markets on a global basis. "Our outlook for the rest of 2011 and beyond remains very positive due to the world's growing population, increasing urbanization, and aluminum's advantages as a light, strong and recyclable material," the company said. Alcoa also reaffirmed its 2011 global aluminum demand forecast of a 12% growth. 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 13 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.

Among other developments, Alcoa recently won a new multi-year contract from Airbus SAS, a unit of European Aeronautic Defense and Space Co. NV, or EADS to supply aluminum sheet and plate products. Terms of the deal were not disclosed, but the agreement has a value of about $1 billion over its life. The aluminum, for fuselage panels and structural components as well as wing skins, will be supplied from plants in Davenport, Iowa; Kitts Green, England; and Belaya Kalitva, Russia. Earlier last month, Alcoa announced it had developed a new generation of alloys and technologies it said could lower the weight of airliners by up to 10 percent and improve fuel efficiency by as much as 12%.

The company's stock currently trades at a forward P/E (fye Dec 31, 2012) of 10.66 and PEG Ratio (5 yr expected) of 0.64. In terms of stock performance, Alcoa shares have gained nearly 3 percent over the past year.

Full Disclosure: None.
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