Shares of aluminum giant Alcoa Inc. (AA) advanced 3% after the company reported second quarter 2010 net earnings of $136 million or 13 cents per share, in contrast to the year-over-year loss of $312 million or 32 cents and a sequential loss of $194 million or 19 cents. Reported earnings outperformed the Zacks Consensus Estimate of 12 cents.
Alcoa’s higher-than-expected earnings were driven by stronger volumes, productivity improvements, favorable currency and lower energy costs, which more than offset the negative impact of a sequential decline in aluminum prices. Average realized aluminum prices were down $22 per ton, to an average of $2,309 per ton in the quarter. However, aluminum prices soared 38% year over year.
Quarterly revenues of $5.2 billion were up 22% year over year and 6% sequentially. Alcoa witnessed higher revenues in several end markets, particularly packaging, commercial transportation, building and construction, industrial gas turbines and aerospace.
Cash sustainability efforts aided to improve the cost of goods sold, as a percentage of sales, by 90 basis points to 81.2% from 82.1% in the first quarter of 2010. EBITDA in the second quarter 2010 was $724 million, while EBITDA margin of 14% was the highest since third quarter 2008.
Segment Results
Alumina: Alumina production in the second quarter improved 15% year over year to 3.9 million tons. Third party sales were up 37% to $701 million on shipments of 2.3 million tons of alumina. Higher production and sales helped the segment report an after-tax operating income of $94 million in the second quarter, in contrast to operating loss of $7 million in the same quarter of the previous year.
Primary Metals: Both aluminum production and shipment were down 14% to 893,000 tons and 699,000 tons, respectively. Average realized aluminum prices were up 38% year over year to $2,309 per ton, while prices were down 1% sequentially. Third party sales were up 33% to $1.7 billion. After-tax operating income was $109 million compared with an operating loss of $178 million.
Flat-Rolled Products: Third party sales shot up 9% to $1.6 billion on shipments of 420 million. After tax operating income of $71 million was a significant improvement from the operating loss of $35 million in the year-ago period.
Engineered Products and Solutions: Third party sales of $1.1 billion inched up 6% from shipments of 50 million tons in the reported quarter. After-tax operating income of $107 million leaped 21% year over year.
Balance Sheet
Debt-to-capital at the end of the second quarter 2010 stands at 38.4%, 130 basis points lower than the second quarter of 2009. Overall debt decreased $465 million from the second quarter of 2009. Cash on hand at the end of the second quarter was $1.34 billion. Free cash flow in the quarter totaled $87 million.
Management’s Guidance
Encouraged by the improving end-demand, Alcoa has raised its estimates for industry aluminum consumption from 10% to 12% in 2010. Further, the company is on track to achieve $1.4 billion out of the $2.5 billion raw material procurement savings and $311 million of the $500 million in overhead cost reduction per annum. Alcoa is also building the world’s lowest cost aluminum refinery complex through the Maaden-Alcoa joint venture in Saudi Arabia.
Zacks Rank
For the third quarter of 2010, out of the 13 analysts covering the stock, 1 has made a negative revision to his or her estimates in the last 7 days, and 8 analysts have downgraded their estimates in the last month.
Alcoa has been battling lower aluminum demand and prices, higher input costs and higher restructuring charges. The company’s share prices plummeted about 32% in the last three months.
The Zacks Consensus is pegged at 15 cents for the third quarter of 2010 with a downside potential of 26.67%. Alcoa has missed the Zacks Consensus Estimate in 2 of the trailing 4 quarters, reflected by the average surprise of 14.03%.
Currently, Alcoa has a Zacks #3 Rank (Hold), but a longer-term recommendation of Underperform.
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