The largest U.S. aluminum producer Alcoa Inc. (AA - Analyst Report) posted a loss in the second quarter of 2012 due to lower aluminum prices. The company, however, expects demand for aluminum to remain strong in the near term.
Second Quarter Flashback
The company posted a loss of $2 million (break-even on a per-share basis) in the second quarter of 2012 compared with a profit of $322 million (or 28 cents a share) in the year-ago quarter.
Excluding one-time special items (including restructuring and other charges, litigation expenses and tax-related items), Alcoa earned 6 cents a share, in line with the Zacks Consensus Estimate and below the year-ago earnings of 32 cents.
Revenues decreased 9.4% year over year and 0.7% sequentially to $5,963 million, surpassing the Zacks Consensus Estimate of $5,828 million. Though weak aluminum prices dragged down revenues, the company witnessed increased demand across aerospace and automotive markets in the quarter. Alcoa stated that aluminum prices dropped 18% year over year and 4% sequentially in the second quarter of 2012.
Alcoa witnessed strong performances across all its businesses driven by higher utilization rates, process innovations, lower scrap rates and usage reductions. The company expects improved aluminum demand from automobile, aerospace, packaging and commercial transportation end markets.
We have discussed the quarterly results at length here: Weak Price Hits Alcoa in 2Q
Agreement – Estimate Revisions
Estimates for Alcoa have barely moved over the past week. Out of 15 analysts covering the stock, just two analysts have lowered their earnings estimate for the third quarter over the past 7 days while none moved in the opposite direction. An identical trend applies to the estimates for fiscal 2012, with two downward revisions.
Estimates for third quarter demonstrates a strong negative bias over the last 30 days with 13 analysts downgrading their forecasts with no upward movement. For fiscal 2012, estimates are negatively inclined over the past month with 14 analysts lowering their forecasts and no positive revisions.
Magnitude – Consensus Estimate Trend
Estimates for the third quarter and fiscal 2012 haven’t moved much over the last week, with each quarterly and annual estimates dropping by a penny. The decline has been much more profound over the last month with estimates for the third quarter decreasing by 14 cents and for fiscal 2012 by 27 cents. The current Zacks Consensus Estimates for the third quarter and 2012 are 3 cents and 29 cents, respectively.
Neutral on Alcoa
Pennsylvania-based Alcoa Inc. is among the world’s leading producers of primary and fabricated aluminum and alumina. The company is engaged in mining, refining, smelting, fabricating and recycling of aluminum.
The company is pursuing strategies to move down its cost curves in its upstream businesses, and record profitability in its midstream and downstream businesses. The company aims to achieve these goals by optimizing its portfolio while restructuring its high-cost assets. In the second quarter of 2012, the company’s midstream and downstream businesses delivered good results driven by the aerospace and automobile markets.
We believe that the company’s cost reduction efforts are, to some extent, will offset the impact of higher energy and raw material costs on its bottom line. Alcoa is divesting underperforming assets through its restructuring program.
Alcoa also contends with weak pricing. In the quarter, realized metal price and alumina price declined 18% and 17% year over year, respectively, leading to lower revenues. Aluminum prices also decreased 18% year over year in the quarter.
The company also competes with Aluminum Corporation of China Limited and RioTinto plc. (RIO - Analyst Report). Currently, the stock maintains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating and we have a long-term Neutral recommendation on the shares of Alcoa.
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