Shares of aluminum producer Alcoa (AA - Free Alcoa Stock Report), the first Dow-30 component to report third-quarter earnings, are down modestly in morning trading after the company registered disappointing results. While the top and bottom lines increased sharply over the year-earlier period, to $6.42 billion and $0.15 a share, respectively, they were weak on a sequential basis, and earnings were well below our $0.24 forecast. The Pittsburgh-based manufacturer failed to meet investors' earnings estimates, despite the fact that Wall Street had scaled back its expectations in recent weeks. Weakness in the Primary Metals and Flat-Rolled Products (FRP) segments hurt results, with the former being hindered by less-than-anticipated fabricating activity. Meanwhile, sluggishness in packaging and consumer markets roiled the FRP unit. Additionally, margins were hampered by a less-than-commensurate fall in input costs.

In the company's defense, the lackluster performance was due to a number of reasons outside its control, including seasonal factors and a precipitous fall in aluminum prices. Meanwhile, concerns over sovereign debt problems in Europe and moderating growth in the United States rattled commodity markets. In the September interim, the metal's value contracted sharply from approximately $2,500 a metric ton, to nearly $2,125.

Alcoa's chairman and CEO, Klaus Kleinfeld, maintained recent weakness in aluminum did not reflect fundamentals. Indeed, he noted that although the typical September boost in orders from Europe did not happen, Chinese consumption helped offset the decline. In the same vein, the manufacturer did not change its forecast for a 12% advance in aluminum demand this year. However, with the International Monetary Fund recently cutting its worldwide growth outlook from 4.5% to 4.0%, we are taking a more cautious stance for 2011. Concerns of weakening global economic activity may cause customers in the automotive, industrial products, construction, and packaging sectors to maintain slim inventory levels, which would likely hamper fourth-quarter results. Furthermore, we look for management to cut production activity if aluminum prices remain depressed. These factors have led us to temper our 2011 share-net tally by $0.20, to $0.90.

The recent selloff, though, adds to the issue's long-term recovery potential. Assuming the global economy is on more solid footing by 2014-2016, demand in automotive, commercial aerospace, and transportation markets should buoy aluminum prices.

About The Company:  Alcoa Inc., a Pennsylvania corporation, is a global leader in the production and management of primary aluminum, fabricated aluminum, and alumina combined. It supplies the aerospace, automotive, building and construction, commercial transportation, and industrial markets.  It has more than 300 operating and sales locations in over 30 countries. Sales of aluminum and alumina account for more than three-fourths of Alcoa’s total revenues. It also produces nonaluminum products, such as precision castings and fasteners for the aerospace and industrial markets. Alcoa’s operations consist of four worldwide reportable segments: Alumina, Primary Metals, Flat-Rolled Products, and Engineered Products and Solutions.

At the time of this writing, the author did not have positions in any of the companies mentioned.