Market Overview

Alcoa Earnings Preview: Lower Q2 Revenue, Flat EPS Expected (AA)

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Alcoa (NYSE: AA), shares of which sank to a multiyear low earlier this week, is scheduled to report its second-quarter 2013 results Monday, July 8, after the markets close.

Alcoa's report marks the unofficial kick-off of the second-quarter earnings season.

Though the management team has a strong track record, a recovery in the price of aluminum has yet to materialize, largely due to the sluggish growth of manufacturing in China. Investors will be looking for any sign that the worst is behind Alcoa, but analysts are not optimistic. J.P. Morgan just downgraded Alcoa, and Moody's downgraded its credit rating to junk status in May.

See also: J.P. Morgan Downgrades Alcoa to Neutral on Lower Aluminum Price Forecasts

Expectations

Analysts on average predict that Alcoa will report revenue for the quarter that fell more than two percent year-over-year to $5.83 billion. Per-share earnings are expected to come to $0.06, which would be the same as in the comparable quarter of last year.

That consensus earnings estimate has slipped in the past 60 days from $0.11 per share. Alcoa has not fallen short of earnings expectations in the past six quarters. The first quarter adjusted profit of $0.11 surprised analysts, who had expected Alcoa to post $0.08 per share.

Alcoa attributed the first-quarter results to stronger demand for aluminum products from airplane and automobile producers. But it also estimated that surplus production would fall to 155,000 tons in 2013 from a previous projection of 535,000 tons, as Chinese smelters cut output. The share price retreated about four percent in the week following the first-quarter report.

So far, the analysts' consensus full-year forecast calls for $0.36 per share earnings on revenue of $23.48 billion. That compares to $0.24 per share and $23.70 billion in the previous year. That consensus EPS estimate has declined in the past 60 days from $0.44.

The Company

Alcoa is the world's third largest producer of aluminum. The company operates in four segments. The Alumina segment engages in mining of bauxite. The Primary Metals segment produces aluminum. The Global Rolled Products segment engages in the production and sale of aluminum plate, sheet and foil. The Engineered Products and Solutions segment produces and sells products used in aircraft, automobiles, building and construction, oil and gas, and other industrial applications.

This S&P 500 and Dow Jones Industrial Average component has a market capitalization near $8.2 billion, and its operational headquarters are in Pittsburgh. Klaus Kleinfeld has been the chief executive since May 2008.

Alcoa's two larger competitors are privately held Rio Tinto Alcan and RUSAL. It also competes with Aluminum Corporation of China (NYSE: ACH), which is expected to post a net loss for this this year, and BHP Billiton (NYSE: BHP), full-year earnings of which are forecast to be about half of what they were last year.

During the three months that ended in June, Alcoa announced plans to expand a Tennessee plant, declared dividends for both its common and preferred stock, cut 500 jobs in Canada, reached a recycling deal with Boeing (NYSE: BA) and announced plans to close a smelter in Italy.

See also: Alcoa to Close Fusina Smelter in Italy

Performance

Alcoa's long-term EPS growth forecast is less than seven percent, and the forward earnings multiple is less than the industry average price-to-earnings (P/E) ratio. The operating margin is greater than the industry average, but the return on equity is less than two percent.

The number of shares sold short is more than eight percent of the float. That is about the same as it was in the previous period. But days to cover rose to more than six, the highest level so far this year.

Only six of the 19 analysts surveyed by Thomson/First Call who follow the stock recommend buying shares; nine of them recommend holding shares. However, the analysts believe the stock has some room to run as their mean price target represents more than 13 percent potential upside. But that target price is less than the 52-week high from last September.

Shares reached a multiyear low on Wednesday, and the share price is now down more than 14 percent from the beginning of the year. It is, of course, well below the 200-day and 50-day moving averages. Over the past six months, the stock has outperformed Aluminum Corp. of China and BHP Billiton, but it has underperformed the Down Jones Industrial Average and the S&P 500.

Posted-In: Alcoa Aluminum Corp. of China BHP BillitonEarnings Long Ideas Short Ideas Previews Trading Ideas Best of Benzinga

 

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