Thursday, January 7, 2010

Alcoa Inc. (NYSE: AA): Q4 Earnings Preview 2009

. Thursday, January 7, 2010

By Stock Wizard

Alcoa Inc. (NYSE: AA), the biggest US aluminum maker, will officially kick off the fourth quarter earnings season after the market close on Monday, January 11, 2010. Analysts, on average, expect the mining giant to report earnings of 7 cents a share on revenue of $4.81 billion. In the year ago quarter, the company reported a loss of 28 cents per share on revenue of $5.69 billion.

Alcoa Inc., often considered as economic bellwether by many, engages in the production and management of primary aluminum, fabricated aluminum, and alumina worldwide. It involves in the technology, mining, refining, smelting, fabricating, and recycling of aluminum.

Early in October, the Pittsburgh, Pennsylvania-based company reported that its third quarter profit tumbled 71% from last year, as the severe economic recession depressed demand and prices for the light metal. However, the results still managed to beat Wall Street estimates. It also marked the company's return to profitability after three consecutive quarterly losses. Net income totaled $77 million or $0.08 per share, compared to $268 million, or $0.33 per share, in the comparable quarter last year. Excluding one-time items, the company said that it earned $39 million or $0.04 per share. Sales dropped 34% to $4.62 billion from $6.97 billion in the same quarter last year. Sales rose 9% quarter-over-quarter. Analysts, on average, expected to report a loss of $0.09 per share on revenue of $4.55 billion. The company attributed the sequential improvement to an increase in realized prices for primary aluminum to $1,972 per metric ton from $1,667 per metric ton in the second quarter, as well as stabilization in the end markets.

Aluminum prices, which slumped during the early part of the year 2009, rallied in fourth quarter on government stimulus measures, increasing economic optimism, and investor appetite for riskier assets. Prices also got a boost from weaker dollar, recovery in housing market, stabilization in auto industry, consumer restocking and Chinese buying also supported prices. Historically, the automotive and construction markets have been the largest drivers of metal consumption, more than 50% of the total demand. Already, large automakers like Ford and Toyota have reported sharp jump in their US car sales. Aluminum prices have risen 75% on the London Metal Exchange from their February 2009 lows of $1,250. Overall, aluminum prices climbed 48% in the year 2009. In the fourth quarter alone, prices gained approximately 19%. Aluminum price reached $2,394 a metric ton on the London Metal Exchange, the highest level since October 2, 2008 amid speculations that snowfall in China will boost input costs and disrupt power, limiting metal production. The country shut 0.5 percent of its capacity to generate electricity as adverse weather hampered coal deliveries. Energy accounts for as much as half of the cost of making the lightweight metal. China is the world’s largest maker as well as user of aluminum.

Recently, Morgan Stanley analyst Mark Liinamaa upped his rating on the shares to “overweight” citing improving profitability in both alumina and some aluminum products. “The shares have rallied with the aluminum price, but we think further upside remains in an economic recovery scenario,” Liinamaa wrote. “We see higher linkage rate for alumina and long-term earnings potential in midstream and downstream assets not reflected in the current stock price.” The analyst predicts that aluminum prices could rise to $1.11 per pound.

Last month, Alcoa entered into a $10.8 billion joint venture with the Saudi Arabian mining company Ma’aden. Alcoa, which will own 40% of the project, is investing $900 million over four years. The venture is expected to produce a low-cost integrated aluminum complex, including a refinery, smelter and rolling mill. According to the joint statement released by the two companies, the venture "will become the world's preeminent and lowest-cost supplier of primary aluminum, alumina and aluminum products, with access to the growing markets of the Middle East and beyond." President and CEO Klaus Kleinfeld said the venture amounts to a "once-in-a-generation opportunity" for the company. No doubt, the project will give the company greater access to the world's biggest proven energy reserves as well as important markets in South Asia.

In terms of stock performance, Alcoa shares have gained 41 percent since the beginning of the year.

Full Disclosure: None.

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