Alcoa Earnings Preview: A Sign Of Earnings To Come?

Each quarterly report from

unofficially kicks off a new earnings season, though its reputation as a bellwether for coming earnings may be diminished by the fact that it no longer is a Dow Jones Industrial Average component. It is scheduled to report its second-quarter results Tuesday July 8, after the markets close. The stock has been on a roll this year, but given ongoing concern over aluminum pricing, investors will be focused on the company's outlook for global demand. And in the wake of Alcoa's recent acquisition of Firth Rixson, investors also will be interested in the outlook for the global aerospace sector.

Analysts on average predict that Alcoa will report that its revenue for the quarter slipped more than three percent year-over-year to $5.64 billion. Earnings of $0.12 per share are also in the consensus forecast. That would be up from a reported profit of just $0.07 per share in the comparable period of last year. Note that the consensus earnings per share (EPS) estimate has remained unchanged in the past 60 days, and the estimates range from $0.09 to $0.16. The company topped analysts' EPS expectations in the previous quarter by 80 percent, but fell short by a third in the period before that. "We hit record downstream profitability, nearly tripled results in the midstream, and strengthened our upstream business for the 10th quarter in a row," said the CEO in the first-quarter report. "Our transformation is accelerating." The share price rose less than four percent following the first-quarter report. Looking ahead, the EPS forecast for the three months that end in September so far calls for revenue marginally lower than a year ago, as well as sequential and year-over-year growth on the top line. Full-year revenues are predicted to be down more than two percent, while earnings are almost 30 percent higher than in the previous year.

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 component has a market capitalization near $17.5 billion, and its operational headquarters are in Pittsburgh but its corporate offices are in New York City. 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, which is expected to swing to a small profit this year, and BHP Billiton, full-year earnings of which are forecast to be up about 20 percent. During the three months that ended in June, Alcoa declared a quarterly dividend, reached a deal with the steelworkers union, was among companies targeted by Chinese hackers, announced expansion of a facilities in Indiana and Virginia and announced the Firth Rixson acquisition.

Alcoa has a long-term earnings per share growth forecast of more than 47 percent. However, its operating margin is less than the industry average, and it has a return on equity that is in the negative territory. And it offers a dividend yield that is near 0.8 percent. Note that the number of Alcoa shares sold short, as of the most recent settlement date, represented about six percent of the total float. That was the second lowest level of short interest in the past year. At the current average daily volume, it would take a little more than six days to close out all short positions. Of the 18 analysts surveyed by Thomson/First Call who follow the stock, only six recommend buying shares. Holding shares has been the consensus recommendation for at least three months. The share price has overrun the analysts' mean price target, but individual targets may rise if Alcoa offers a positive surprise or rosy guidance. Shares ended last week up more than 41 percent year to date. The share price is above the 50-day and 200-day moving averages. Over the past six months, the stock has handily outperformed not only the broader markets, but Aluminum Corporation of China and BHP Billiton as well.

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