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Alcoa (AA) Q4 Earnings Preview: Seasonal Weakness May Hurt Results

 January 04, 2013 12:47 PM

(By Mani) As the market steps into a new year, aluminum producer Alcoa, Inc. (AA) is expected to report its financial results on Jan.8, thereby officially kick-starting the fourth-quarter earnings season.

Alcoa is one of the world's leading producers of aluminum and alumina and is a vertically integrated producer of fabricated aluminum products. The company operates in all segments of the industry: mining, refining, smelting, fabricating, and recycling. Alcoa serves customers worldwide in the aerospace, automotive, packaging, building and construction, commercial transportation, and industrial markets with a wide variety of products.

[Related -Do Earnings Mean Anything Anymore?]

Alcoa's results are eyed closely as it usually is the first Dow component to report earnings, and investors often watch AA's results to gauge how earnings may fare for other companies. Moreover, the results always impact the broader market, including index futures and ETFs.

Wall Street expect Alcoa to earn 7 cents a share, according to analysts polled by Thomson Reuters. In the year-ago quarter, the company reported a loss of 3 cents a share.

Alcoa's earnings have managed to beat consensus estimates twice in the past four quarters while three analysts have increased their earnings estimate in the past 30 days.

However, quarterly revenues are expected to decline 6.30 percent to $5.61 billion. In the year-ago period, it generated sales of $5.99 billion.

Overall, the results would be strong when compared to the third quarter of 2012 as strong aluminum prices would have a positive impact.

[Related -Alcoa Inc (NYSE:AA) Q4 Earnings Preview: What To Expect?]

"On a 15-day lag basis, LME prices were up $0.06/lb, which should result in an $0.08 increase in EPS versus Q3/12 when combined with stronger regional premiums," RBC Capital Markets analyst Fraser Phillips wrote in a note to clients.

Meanwhile, currency movements should have a net negligible impact as strength in the EUR, CAD, and NOK was nearly offset by weakness in the BRL and AUD.

Alumina and Primary Metals combined should be relatively flat, excluding the impacts of pricing, currencies, and curtailments. However, curtailments in Primary Metals are expected to lead to a negative $15 million (1 cent/share) impact to after tax operating income (ATOI).

Downstream business should be down due to seasonal weakness in packaging as well as weakness in global industrial markets. Alcoa expects Global Rolled Products ATOI to be down 20 – 25 percent due to a seasonal decrease in packaging, weak industrial markets, and slower growth in Russia and China.

Engineered Products and Solutions ATOI is expected to be down 13 percent in line with previous years, due to weakness in end markets, namely building & construction and heavy trucks.

Last month, Moody's placed Alcoa's debt rating on review for a possible downgrade, citing weaker aluminum prices amid struggling economic conditions in the U.S. economy, Europe, and slower growth in China.

New York-based Alcoa was severely hurt by the recession and slashed over 20,000 jobs and closed plants in the U.S. and Europe to negate the global economic slowdown. In early April, Alcoa said it would reduce its annual alumina production capacity by 390,000 metric tonnes, or about 2 percent.

For the third quarter ended Sept. 30, 2012, the company reported a net loss of $143 million or 13 cents a share, compared to net income of $172 million or 15 cents a share for the year-ago quarter. Sales for the quarter fell 9 percent to $5.83 billion.

Shares of Alcoa are edging higher given the pending announcement of fourth-quarter results, gaining 8 percent in the last one month, and are nearing the $9.20 resistance level. If the results lagged Street views, then the shares may retreat to trade below the 50-day and 200-day moving averages of $8.50 and $8.88, respectively.

"The prospects for the shares depend on the outlook for the aluminum market. Aluminum prices are now sitting at about the 75th percentile of the cash cost curve, where we believe they must stay to constrain production and balance the market," Phillips noted.

"Over the longer term, our analysis suggests that the aluminum market will continue to suffer from significant excess inventory and capacity, and we expect aluminum prices to be constrained as a result. At the same time, we expect rising costs will put downward pressure on margins," Phillips added.

As a result, there is limited upside potential for the Alcoa share price over the next 12 months.



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