Alcoa Rises as Q1 Earnings Top - Analyst Blog

Alcoa Inc. AA posted a loss in the first quarter of 2014 as hefty restructuring charges and weak aluminum prices weighed on its bottom line in the quarter. But its shares rose as earnings, barring items, topped expectations.

The U.S. aluminum giant raked in a loss of $178 million or 16 cents per share in the first quarter compared with a profit of $149 million or 13 cents per share in the year-ago quarter. The company recorded $276 million in restructuring charges and other special items in the quarter, mostly related to smelter and rolling mill capacity reductions.

Excluding one-time special items, earnings came in at $98 million or 9 cents per share in the reported quarter, below the year-ago earnings of $121 million or 11 cents. However, it surpassed the Zacks Consensus Estimate of 5 cents.

Revenues dropped roughly 6.5% to $5,454 million in the first quarter from $5,833 million in the year-ago quarter. It missed the Zacks Consensus Estimate of $5,561 million. The decline was primarily due to weak aluminum prices which dropped 8% year over year.

Alcoa has reaffirmed its global aluminum demand growth expectations of 7% for 2014.

Alcoa's shares, which are up around 18% so far this year, rose as much as 3.3% in after-hours trading yesterday, reflecting the healthy earnings beat. The stock is up 51% over a year.

While many no longer consider Alcoa a major earnings season bellwether following its exclusion from the Dow Jones Industrial Average last year, its results still matter as they shed light on demand trend for aluminum across a gamut of industries, which is closely linked to levels of economic activity.

Segment Review

Alumina - Shipments in the reported quarter were 2.6 million metric tons on production of 4.2 million metric tons. After Tax Operating Income (ATOI) was $92 million, up from $58 million in the year-ago quarter and $70 million in the sequentially preceding quarter. The results were driven by strong productivity savings, positive Alumina Price Index-based pricing and the sale of Alcoa's Suriname gold mine interest, partly offset by lower LME prices, lower volumes and higher energy costs.

Primary Metals - Shipments in the quarter were 0.6 million metric tons, down 12.5% from the year-ago quarter. Production in the quarter was 0.8 million metric tons, down 6.2% from the year-ago quarter. ATOI was negative $15 million compared with an income of $39 million in the year-ago quarter and negative $35 million in the prior quarter.

The sequential improvement in ATOI was led by higher regional premium prices along with value-add product mix improvements, and favorable energy prices. However, these were offset by negative LME prices, increased alumina costs and taxes, as well as costs related to smelter closures at the Point Henry and Massena East smelters.

Global Rolled Products - Shipments in the quarter were roughly 0.5 million metric tons, up 3.8% year over year. Third-party revenues were $1.7 billion, down 5.7% year over year. The segment posted ATOI of $59 million (including a charge of $11 million related to the permanent shutdown of the Australia rolling operations), down 27.2% year over year and up nearly three-fold sequentially. The sequential jump was due to record auto sheet quarterly revenue, increasing demand in industrial and commercial transportation products, and higher productivity and fixed cost absorption from higher mill utilization.

Engineered Products and Solutions - Shipments in the quarter were 0.06 million metric tons, up 5.5% year over year. The segment posted first quarter ATOI of $189 million, up 8.5% year over year and 12.5% sequentially. The sequential rise was due to higher volumes in aerospace and commercial transportation coupled with favorable productivity across all businesses.

Financial Position

Alcoa's cash and cash equivalents stood at roughly $0.7 billion as of Mar 31, 2014, down from $1.55 billion as of Mar 31, 2013. Alcoa had a debt-to-capital ratio of 35%, flat year over year.

Portfolio Transformation

Alcoa made several investments during the reported quarter. In its midstream business, Global Rolled Products made an investment of $40 million in Itapissuma, Brazil rolling mill to increase production of specialty foils. The company also commissioned the $300 million expansion at its Davenport, IA facility. The company's aim is to generate $1 billion in incremental revenue growth by 2016.

The company also announced that it is investing $13 million in its wheel plant in Szekesfehervar to meet the rising European demand for its Dura-Bright surface-treated wheels. Alcoa, launched the world's lightest heavy-duty truck wheel-the Ultra ONE - within its downstream business, Engineered Products and Solutions.

Strategic Actions

Alcoa's strategic re-positioning of its value and commodities businesses is working very well. The company is making capital investments and remains on track to move down the cost curve and curtail capacities in its upstream business. The curtailments will improve the competitiveness of the company's Primary Products business.

During the quarter, Alcoa announced various capacity curtailments. The company announced that it will permanently close Point Henry aluminum smelter in Australia by Aug 2014, thereby curtailing 190,000 metric tons. Also, it announced the closure of two remaining potlines at the Massena East, New York smelter, totaling 84,000 metric tons of smelting capacity.

Alcoa has realized $250 million year-over-year productivity savings, of its target of $850 million. The company's capital expenditures amounted to $92 million against an annual plan of $500 million and controlled sustaining capital expenditures of $117 million against a $750 million annual target. The company is also progressing on the Saudi Arabia joint venture project with $35 million already invested against a $125 million annual plan.

Outlook

The company raised its expectations to 8%–9% global growth in the aerospace sector in 2014 from the previous expectations of 7%–8% on the back of strong demand for both large commercial aircraft and regional jets and continued growth in the business jet market. Alcoa's growth forecast for other markets are – automotive (1%-4%), packaging (2%-3%), commercial building and construction (4%-6%).

Alcoa expects the transportation market to remain steady (-1% to 3%) in 2014 after witnessing a strong 2013. The company forecasts a decline in the industrial gas turbine market (-8% to -12%) on lower orders for new gas turbines and spare parts.

Alcoa is a world leader in production and management of primary aluminum, fabricated aluminum, and alumina. The company is also the world's largest miner of bauxite and refiner of alumina.

Alcoa is divesting underperforming assets through its restructuring program and is aggressively pursuing cost-cutting actions. However, the company contends with   pricing pressure.

Alcoa currently retains a Zacks Rank #3 (Hold).

Other mining companies worth considering are General Moly, Inc. GMO, Platinum Group Metals Ltd. PLG and Alexco Resource Corporation AXU, all carrying a Zacks Rank #2 (Buy).