Alcoa Earnings Preview: Lower Revenue, Flat EPS Expected for Q4

is scheduled to report its fourth-quarter 2013 results Thursday, January 9, after the markets close. Its report has long been seen as kickoff of each new earnings season, though it may become less relevant now that the stock has been dropped from the Dow Jones Industrial Average. Aluminum prices remain low but stable. On the plus side for investors, demand for aluminum is growing, particularly in the auto and aerospace industries. On the other hand, aluminum producers are not getting much of a boost from China.

Analysts on average predict that Alcoa will report revenue for the quarter that fell more than eight percent year-over-year to $5.40 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 remained unchanged in the past 60 days. Alcoa has not fallen short of earnings expectations in the past four quarters. The third-quarter adjusted profit of $0.11 surprised analysts, who had expected Alcoa to post $0.05 per share. The CEO said in the third-quarter report: "Our commodity business delivered better performance in a tougher market environment, and we continued to reshape the portfolio to lower the cost base. Across the board, productivity was exceptional -- achieving our full year target in the first nine months." The share price rose more than six percent in the days following the report. The analysts' consensus full-year forecast calls for $0.34 per share earnings on revenue of $22.92 billion. That compares to $0.24 per share and $23.70 billion in the previous year. That consensus EPS estimate also has remained steady over the past 60 days.

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. Alcoa is a S&P 500 component and it has a market capitalization near $11.3 billion. Its operational headquarters are in Pittsburgh. Klaus Kleinfeld has been the chief executive officer since May 2008. Alcoa's two larger competitors are privately held Rio Tinto Alcan and RUSAL. It also competes with Aluminum Corporation of China, which is expected to post a net loss for the year just finished, and BHP Billiton, for which analysts so far forecast solid earnings growth for the fiscal year that ends in June. During the three months that ended in December, Alcoa unveiled a new alloy for aluminum wheels, formed a joint venture with a Russia titanium producer to develop aerospace products, cautiously supported the London Metal Exchange's warehousing policy overhaul and signed a $110 million supply deal with Airbus.

Alcoa's long-term EPS growth forecast is more than 21 percent, but its price-to-earnings (P/E) ratio is a hefty 38.4. The operating margin is greater than the industry average, but the return on equity is only a little more than two percent. The company offers a dividend yield of around 1.1 percent. The number of shares sold short was about 11 percent of the float at the December 13 settlement date, after rising by about 2.3 million, or about two percent, from the previous period. It would take about six days to close out all of the short positions. Only four of the 19 analysts surveyed by Thomson/First Call who follow the stock recommend buying shares; nine of them recommend holding shares. The share price has overrun the mean price target, meaning that analysts see no potential upside at this time. Even the street high price target is only marginally higher than the current share price. Shares reached a new 52-week high at the end of December, and the share price is now up about 33 percent from six months ago. It is well above the 200-day and 50-day moving averages. Over the past six months, the stock has outperformed not only Aluminum Corp. of China and BHP Billiton, but the Dow Jones Industrial Average and the S&P 500 as well.

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