US aluminum giant Alcoa Inc. (AA) is scheduled to report its first quarter 2010 profit on April 12, 2010.

Management has not provided any financial guidance for the quarter. However, it is expecting to record a total charge of $260 million. The company is expected to record $180 million as exit costs related to the closure of two smelters – one in Frederick, Maryland and the other in North Carolina.

The company is likely to record a second charge of $80 million arising due to the new health care reform that has resulted in changes in tax obligation for a federal subsidy paid to employers for some retiree prescription drug plans. Apparently, such high charges would impact profitability in the upcoming quarter.

However, the Pittsburgh-based company expects stabilizing end-markets, especially global truck, trailer and automotive market, to result in a 10% increase in demand for the quarter. Revenues are expected to climb 18% in the full year 2010. We believe rising aluminum prices should also trigger revenues. Higher aluminum prices drove an 18% sequential increase in top line to $5.4 billion in 2009.

To boost savings, Alcoa has proposed to cut 24,600 jobs to save an annualized $600 million. In 2009, the company had shed 21,500 positions and saved $325 million. Alcoa’s headcount is down to 59,000. It plans to cut 3,100 jobs by the first quarter of 2010.

Alcoa’s cost-cutting efforts helped in overhead cost savings of $412 million and raw material procurement savings of $2 billion in 2009, $500 million more than the target for the year. The company sources raw materials externally, including coke used in the smelting process, and caustic soda used to refine bauxite into alumina. Reduction in working capital generated more than $1.3 billion in cash, which is $500 million more than the 2009 target of $800 million.

We believe the cost cuts will make the company more competitive once markets recover fully.

Estimate Revision Trend

Alcoa is expected to earn 13 cents in the quarter as per the Zacks Consensus Estimate. The company had reported losses of 59 cents in the first quarter of 2008. Alcoa recorded a modest profit of 1 cent per share in the last quarter of 2009. For 2010, Alcoa is expected to record net earnings of 82 cents in contrast to a net loss of $1.23 per share reported in 2009.

Over the last 7 days, 1 out of the 14 analysts covering the stock revised the estimate in the upward direction while 2 analysts have done a downward estimate revision. Over the last 30 days, 2 analysts have revised their first quarter estimates upwards while 5 analysts have revised their estimates downwards.

For 2010, 4 of the 14 analysts have revised their estimates downwards while 5 have upgraded their estimates. Hence we have a long term recommendation of “Neutral” on Alcoa.

With respect to earnings surprises, Alcoa has missed the Zacks Consensus Estimate twice in the trailing four quarters. This is reflected in the average earnings surprise of 22.19%. The Zacks Consensus Estimate for the first quarter and full year 2010 are 13 cents per share and 82 cents per share, respectively, having a downside potential of 15.38% and 3.66% for the first quarter and full year 2010.

“AA” Free Stock Analysis: Buy? Sell? Hold?
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