Earnings Scorecard: Alcoa – Analyst Blog

Shares of aluminum giant Alcoa Inc. (AA) advanced 3% after the company reported results for the second quarter of 2010, reversing the trend of consistent decline in the share price since its first quarter 2010 results.

Alcoa recorded 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 by $22 per ton, to an average of $2,309 a ton in the quarter. However, aluminum prices were up 38% year over year.

Encouraged by the improving end-demand, Alcoa has raised its estimates for industry aluminum consumption from 10% to 12% in 2010.

 For a full coverage on second quarter earnings, read:
www.zacks.com/stock/news/36804/Alcoa+Outperforms%2C+Improves+Outlook

Analysts and investors have remained negative on Alcoa. For the third quarter of 2010, out of the 13 analyst covering the stock, 3 have made negative revisions to the estimates in the last 7 days and 8 have downgraded the estimates in the last 1 month.

A similar trend has been noticed for the full year 2010. Out of the 17 analysts covering the stock, 4 analysts and 11 analysts have revised the estimates negatively in the last 7 days and last 1 month, respectively. Only 2 of the 17 analysts have made an upward revision to the estimates in the last 7 days.

Analysts have a negative outlook for both third quarter and full year 2010. Over the last 7 days, the estimate for the third quarter has decreased by 3 cents, while for the full year 2010 the same declined by 2 cents.

Alcoa has been battling lower aluminum demand and prices, higher input costs, higher restructuring charges. The company saw its share price fall 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 out of the trailing four quarters, reflected in the average surprise of 14.03%.

Currently, Alcoa has a short term (1 to 3 months) Zacks #3 Rank (Hold) but an Underperform recommendation for long term (6 months and higher).

Alcoa Inc. is facing lower aluminum prices and higher input costs. In our view, Alcoa’s near- to medium-term profitability is likely to see pressure from rising energy and caustic soda costs. Although Alcoa witnessed a modest positive currency effects in the last reported quarter, we believe that the depreciation of the U.S. dollar is likely to translate into higher costs for Alcoa’s overall operations. Additionally, higher restructuring charges are pressuring the margins of the company. We believe Alcoa’s weak performance will continue for the rest of 2010.

The aluminum industry is generally highly cyclical with prices driven by worldwide supply and demand forces along with other influences. Alcoa is subject to cyclical fluctuations in LME prices, general economic conditions and aluminum end-use markets. The greatest risk for Alcoa is a further deterioration in aluminum prices. If there is any significant decline in aluminum prices in 2010, Alcoa is likely to underperform. If the global economy worsens, demand for aluminum and aluminum-based products would also deteriorate consequently, pulling down Alcoa’s shipments and revenues.