The world's largest aluminum producer Alcoa (NYSE: AA) will kick start earnings season by announcing its first quarter earnings number after the market closes tonight. Ahead of its results announcement, the company announced a production cut, much in the similar fashion of as AA did in its fourth quarter. There are reports suggesting that the materials sector could report one of its worst performances as the sector earnings might witness around a 14 percent drop.
The company's results are viewed for more than one reason. It could set the tone for a strong or depressed earnings season. Secondly, it will pinpoint the status of the aluminum sector, especially if supply is outpacing demand and hurts pricing. After last Friday's unimpressive job data, the market is expecting somewhat positive news from the biggest aluminum maker to lift the sentiments.
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On April 5, Alcoa disclosed its intention to reduce alumina output by 390,000 tons, which is two percent of its worldwide capacity. This is in continuation of its earlier intention to cut 531,000 ton in aluminum smelting output, which works out to a negative 12 percent.
The company is scheduled to reduce its output by 90,000 ton in Spanish smelters by the first half of 2012. However, its efforts to effect a similar move faced rough weather in Italy. Due to pressure from unions, Alcoa had to postpone its 150,000 ton smelter cut plans in Italy until the end of 2012.. This apart, the company has also put its Australia's Point Henry unit's 190,000 tons smelter under review due to increasing costs and a strong Australian currency.
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While pricing may have grown to offset rising raw material costs, the large supply versus demand turns the stock somewhat bearish. Much will depend on how well the Chinese market behaved in the first quarter. It is estimated that China will account for 44 percent of worldwide smelting production in 2012. This is 11 percentage points higher than 33 percent in 2008. Aluminum demand in China is projected to witness 12 percent growth in 2012.
Although prices witnessed 18 percent downside in 2011, demand recorded 10 percent upside in the same period. However, large supply is hurting prices. During the fourth quarter earnings results, Alcoa indicated that it sees a 7 percent upside in global aluminum demand in the current year. This was significantly higher than worldwide aluminum demand of 6.5 percent rate.
The company should look towards the Aerospace industry that's predicted to grow 10 – 11 percent, while the automotive sector is estimated to advance 3 – 8 percent in 2012. The company should also look towards transportation, packaging, and construction sectors for growth opportunities.
Meanwhile, Deutsche Bank has reiterated its Hold rating on Alcoa shares with a price target of $10, which is 40 cents below Monday's closing price of $9.60. The brokerage's target price is below 17 brokers' mean and median target of $11.70 and $11.25 respectively.
Currently, Street analysts' are predicting Alcoa to suffer a loss of 4 cents a share on revenues of $5.77 billion for the first quarter. This is in contrast to earnings of 28 cents a share on revenues of $5.77 billion recorded in the first quarter of 2011.
The current expectation from analysts' is in contrast to earlier expectations for earnings of 8 cents a share three months ago.
Alcoa suffered a loss of $193 million or 18 cents loss a share in the fourth quarter of 2011 versus $258 million profit from continuing operations or 24 cents a share in the year-ago quarter. On an adjusted basis, the loss would have been $34 million or 3 cents loss a share, which was in line with Street predictions.
Revenue was $5.99 billion, up 6 percent from $5.65 billion in the previous year quarter. This was higher than Street consensus of $5.74 billion.
Within the last three months, analysts' have reduced EPS estimates for the second quarter to 12 cents a share from 17 cents a share. Significantly, full year earnings predictions have come down drastically to 48 cents a share from 82 cents a share 90 days back.
Shares of Alcoa moved up by 1.8 percent based on April 9 closing price of $9.60 after its fourth quarter results. In the same period, the S&P 500 advanced 7.93 percent indicating underperformance for the stock due to industry trends. Investors will look for an updated outlook from Alcoa for the remainder of the year. This is expected to guide the future movement of the stock.