Alcoa Preview: Expectations are low, but so are aluminum prices

Falling aluming prices and rising inventories may hold back Alcoa's guidance and could overshadow a second-quarter report that at first blush might look OK versus fast-sliding expectations. Alcoa is now on the short list at Zacks.com of companies that have potential to beat earnings expectations. It is expected to report earnings of 5 cents a share after the bell. That might be not so impressive, though. Earnings had been 32 cents a share a year earlier. And Alcoa had been expected to earn as much as 15 cents a share earlier in the quarter. Analysts started slashing estimates due to lower aluminum prices that threaten to eat away at the company's profit margin. Aluminum that fetched around a dollar a pound at the end of March dropped as low as 83 cents toward the end of the quarter, near a two-year low. One of the biggest concerns going forward is how aluminum prices might weigh on future earnings. Lower natural gas prices – one of the main inputs in aluminum production – may not provide much upside to margins if prices continue to fall. And recent productivity gains may not help as much, either. The company's outlook is now a far cry from what CEO Klaus Kleinfeld described just three months earlier. Back in April, Kleinfeld saw a strengthening North American business, growth in all segments in China, and a European business that was still “hovering along”. The company had increased its 2012 growth projection for its aerospce business just three months ago, driven by strong demand for large commercial aircraft. And it continued to see rising demand from automakers that are under pressure to make lighter vehicles to boost MPG. Yet it's Europe's continued woes, a stronger U.S. dollar and the sliding aluminum price that are all expected to be topics on the company's conference call – perhaps trumping what the company may say about aerospace and autos. The $9 price will be worth watching. It's near-term price resistance, as well as the most active options strike. Call volume is out-weighing put volume at more than a 4-to-1 ratio.