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Alcoa Inc. (AA - Analyst Report) is scheduled to report its third-quarter 2012 results after the market closes on Tuesday, October 9. Analysts polled by Zacks are currently expecting the company to break even on a per share basis on revenues of $5.62 billion.

With respect to earnings surprises, the company has posted two negative surprises in the preceding four quarters while it beat and met the Zacks Consensus Estimate on the other two occasions. Alcoa has delivered an average negative earnings surprise of 28.79% over the trailing four quarters, implying that it has missed the Zacks Consensus Estimate by that measure.

Second Quarter Flashback

Alcoa reported loss in the second quarter of 2012, hurt by lower aluminum prices. The company posted a loss of $2 million (break even on a per share basis) in the quarter 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 but below the year-ago earnings of 32 cents.

Revenues decreased 9.4% year over year and 0.7% sequentially to $5,963 million, but were ahead of the Zacks Consensus Estimate of $5,828 million. While weak aluminum prices dragged down revenues, the company saw 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.

Company’s Outlook

For 2012, Alcoa reiterated its aluminum growth forecast of 7% globally. The company also continues to expect a deficit in global aluminum supply in 2012.

Estimate Revisions Trend

Agreement
 
In the past 30 days, 7 analysts (out of 15) have made downward revisions while 1 analyst has raised his/her estimate for the third quarter. Over the last 7 days, there has been one upward revision coupled with a sole reverse movement.

Magnitude

Given the relative lack of movements, estimate for the third quarter has been static (at break even per share) over the past week. However, the directional pressure from a number of downward revisions has resulted in a decline of 3 cents in the estimate for the quarter over the past month.  

Our View

We believe that Alcoa’s outlook depends on the uncertainties in the aluminum market. In addition, we remain concerned about the volatile aluminum pricing and rising raw material costs. We expect rising energy and raw material (especially caustic soda) costs to continue constrain margin.

The company is pursuing strategies to move down its cost curves in its upstream businesses, and record profitability in its midstream and downstream businesses. In conjunction with the revenue targets, management is committed to improving margins that will exceed historical levels in the midstream and downstream operations. The company aims to achieve these goals by optimizing its portfolio and restructuring its high-cost assets.

Alcoa is aggressively slashing costs. The company curtailed 390,000 metric tons of its system smelting capacity to improve its competitive position. Alcoa, in January 2012, announced the temporarily idling of a portion of the smelters in Aviles and La Coruna, both of which will be operating at roughly 50% of capacity.

However, we are optimistic about Alcoa’s long-term growth projects in China, Russia, Brazil and Saudi Arabia. Demand from these countries is expected to increase its alumina and aluminum production while lowering its operating costs. The company has established itself already as a key domestic supplier in some of the markets like packaging, aerospace, and commercial and transportation in Russia.

Alcoa faces stiff competition from Aluminum Corporation of China Limited and Rio Tinto plc. (RIO - Analyst Report). The company retains a Zacks #3 Rank, indicating a short-term (1 to 3 months) “Hold” rating. Currently, we have a long-term (more than 6 months) “Neutral” recommendation on the stock.
 

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