Alcoa (AA - Free Alcoa Stock Report), one of the world's biggest aluminum producers and Dow-30 component, reported uninspired third-quarter results. Though, sales of $5.83 billion modestly eclipsed our $5.65 billion estimate, the figure represented a 9% year-over-year decline. Unfavorable comparisons were due to capacity curtailments and a sharp correction in aluminum prices. During the September quarter, the metal's price averaged $1,950 per ton, 20% less than the year-earlier period, on the London Metal Exchange (LME). These conditions proved detrimental for two divisions that produce the metal in its basic form, Alumina and Primary Metals divisions, mitigating healthy conditions within the company’s downstream realm. In fact, the Global Rolled Products and Engineered Products and Solutions segments, which make parts and components for the automotive and aerospace industries, performed well.
Lower volumes and the elevated cost of energy mitigated productivity improvements, resulting in a material year-over-year pullback in share earnings to $0.03. This share net showing excluded charges for settlements with the Environmental Protection Agency and a joint venture partner in the Middle East.
Our full-year top-line forecast remains at $23.3 billion, but we have tempered our share-profit estimate by a penny, to $0.19. Sluggish demand and excess capacity have resulted in flush inventory levels. This, combined with uncertain global factors (the ongoing European debt crisis, concerns of slowing economic activity in China, and unresolved impediments in the U.S. economy loom large) suggest aluminum consumption will remain weak.
The futures market tells another story, though. Since falling to $1,800 per ton on the LME in August, aluminum prices have recovered some ground and currently approximate $2,045 a ton. The rally, being experienced by most base metals, is probably due to a decision by the Federal Reserve Bank to commence another round of quantitative easing. Elsewhere, the European Union and China have taken steps to inject liquidity into their own respective systems. But with supply/demand dynamics unfavorable, the rebound may well be unsustainable.
Not surprisingly, Alcoa tempered its 2012 forecast for global aluminum consumption growth by 1%, to 6%. Recently, the International Monetary Fund cut its global growth estimate (from 3.5% to 3.3%), citing lower-than-expected economic activity by the world's biggest aluminum user, China. Given the precarious state of affairs, Alcoa appears ready to act. All told, the biggest manufacturers of the shiny metal have idled roughly 1.2 million tons of capacity since 2011. Prices below $1,900-$2,000 are apt to bring additional curtailments.
As the aforementioned impediments weigh on sales, Alcoa remains steadfast on paving the road for better operating margins in the years ahead. In fact, this Pittsburgh-based producer is making efforts to boost efficiency throughout operations: from the mining of bauxite, to the refining and production of aluminum and downstream offerings.
We are more optimistic about Alcoa's long-term prospects. Tightening environmental standards are forcing auto manufacturers to use greater quantities of this relatively light metal. In fact, Chairman and CEO Klaus Kleinfeld maintains an outlook in which global demand will double between 2010 and 2020.
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.