Shares of Alcoa Inc. (AA) advanced about 3% to $12.54 in after hours with the aluminum major reporting net earnings of $96 million or 9 cents per share (excluding non-recurring charges of 3 cents), outperforming the Zacks Consensus Estimate of 6 cents and last year’s net income of $39 million or 4 cents per share (net of one-time charges). Encouraging full year 2010 guidance further triggered positive market sentiments. Alcoa anticipates a 13% (higher than the prior guidance of 12%) rise in global aluminum demand on stronger end markets in China, Brazil, India and Russia, especially building and construction, transportation and packaging.
Quarterly revenues of $5.3 billion exceeded the Zacks Consensus Estimate of $4.8 billion as well as year-ago revenues of $4.6 billion. A 15% year-over-year rise in revenues was a result of higher aluminum (3%) and alumina shipments (7%). Demand was pronounced in the Packaging market (up 11%), Commercial Transportation market (10%), Building & Construction market (10%) and Aerospace (3%).
Lower aluminum demand, prices and unfavorable currency impacts abated sequential earnings growth. Reported third quarter earnings were substantially down from last year’s earnings of $137 million or 13 cents in the previous quarter. Revenues inched up 2% sequentially, including a 3% and 7% rise in aluminum and alumina shipments. Volume gains were offset by lower realized prices. Realized prices for alumina declined 5% while that of aluminum was down 2% in the quarter.
Segment Review
Alumina: Revenues jumped 35% to $717 million in the third quarter. Alcoa sold 2.4 millions tons of alumina on a production of 4 million tons. Year over year, alumina production increased 12% while sales improved 11%. Cost related to the recovery of the alumina refinery in Sao Luis (Brazil) affected operating income, which improved by only 8% year over year to $70 million despite a healthy top line. A 5% decline in realized alumina price and a negative currency impact drove a 35% sequential decline in profitability.
Primary Metals: Revenues in the quarter shot up 19% to $1.7 million on a 15% rise in realized aluminum prices to $2,261 per ton. Volumes, both production and sales, remained flattish in the third quarter, at 891,000 tons and 708,000 tons, respectively. Lower production was due to the ramp-up in activities at the Aviles smelter in Spain , which is expected to reach full capacity by the end of 2010. A higher year over year realized aluminum price yielded an operating income of $78 million that reversed operating losses of $8 million in the same quarter of 2009. Sequentially, realized aluminum prices declined 21%, leading to a 40% decline in operating income. Increasing energy and carbon product prices also affected profits during the quarter.
Flat-Rolled Products: The Flat-Rolled segment is witnessing higher costs associated with the Tennessee hot mill, lower production levels in North America, and the shutdown of the European plants. However, improving end market conditions and increased volumes in China, North America and Russia are mitigating the negative impacts of these headwinds. Alcoa’s Russian operations reported its second consecutive quarter of profitability while the Bohai facility in China continued its ramp-up. During the quarter, North American production volumes were low and shipments fell 6%. Revenues in the segment were modestly up (8%) to $1.6 million. Operating income fell 7% sequentially to $66 million. However, it was a significant improvement from $10 million in the year-ago period.
Engineered Products and Solutions: Reckoned year over year, revenues in the segment remained nearly flat at $1.2 billion. A 4% sequential improvement in revenues was due to a higher demand in the aerospace and increased market share in the building and construction market. Operating profit of $114 million perked 18% up from the year-ago period while it was a modest 6.5% improvement from the previous quarter.
Savings and Capex
Year to date, Alcoa recorded $2.2 billion in cost synergies (full year target of $2.5 billion) related to raw material procurement and overhead savings of $431 million (target of $500 million). Alcoa has spent about $785 million as capital outlays during the first nine months of 2010 from the full year target of $1.25 billion. Capital expenditures of $216 million during the quarter were flat with the second quarter of 2010.
Cash Flow and Debt
Cash from operations more than doubled to $392 million from the year-ago period while it soared 31% from the second quarter of 2010. Alcoa offloaded $764 million in debt year over year and $491 million in debt sequentially. Consequently, debt-to-capital ratio reduced 2.6% year over year to 35.7% in the reported quarter and was down 2.7% from the previous quarter.
Zacks Recommendation
Alcoa is counting on the foreign markets of China, Russia, Brazil and India. Besides, we are optimistic about the company’s long-term growth projects in Australia, Jamaica and Suriname where Alcoa’s alumina and aluminum production capacity is expected to increase while lowering operating costs. The company has recently expanded its Alumar refinery in Brazil and doubled its annual capacity from 1.5 million tons to 3.6 million tons of alumina. We expect such expansions to drive Alcoa’s top line. However, softening aluminum prices remain a concern.
Currently, Alcoa has a long-term (6+ months) Neutral recommendation supported by a short-term (1 to 3 months) Zacks #3 Rank (“Hold”).
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