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Alcoa Inc. (AA - Analyst Report) is scheduled to report its fourth quarter and full-year 2012 results after the market closes on Tuesday, January 8. The Zacks Consensus Estimate for earnings for the quarter is 7 cents per share, representing a significant year-over-year estimated decline of 316.67%. For the full year, the Zacks Consensus Estimate for earnings is 24 cents per share, representing an estimated year-over-year decline of 66.02%.
With respect to earnings surprises, Alcoa has delivered an average negative earnings surprise of 25% over the trailing four quarters, implying that it has missed the Zacks Consensus Estimate by that measure.

Third Quarter Flashback

Alcoa reported a loss in the third quarter of 2012, hurt by a hefty charge associated with environmental remediation and legal settlement and lower aluminum pricing. The company posted a loss of $143 million or 13 cents per share in the quarter compared to a profit of $172 million or 15 cents per share in the year-ago quarter.

Excluding one-time special items (including a $175 million charge mainly related to environmental remediation of the Grasse River and the settlement of a civil lawsuit against Aluminum Bahrain), Alcoa earned $32 million or 3 cents per share in the quarter. Analysts polled by Zacks were expecting the company to report break-even results. The company recorded a $40 million charge associated with the legal settlement in the quarter.

Revenues decreased 9.1% year over year and 2.2% sequentially to $5,833 million, but were ahead of the Zacks Consensus Estimate of $5,565 million. Alcoa said that aluminum prices dropped 17% year over year and 5% sequentially in the third quarter.

Alcoa lowered its global aluminum demand forecast for 2012 to 6% from its earlier expectation of 7%, owing to the slowdown in China. The company, however, expects the aluminum market to double in 2020 from the 2010 levels as the market is already ahead of the required 6.5% compound annual growth rate.

Estimate Revisions Trend

Agreement
 
In the past 30 days, 2 analysts (out of 14) have revised their estimates upward while 5 have decreased their estimates for the fourth quarter. Over the last 7 days, none of the analysts raised their estimates while one downward revision was witnessed.

A similar trend is seen for full-year 2012 with 2 analysts (out of 15) having made upward revisions in the past 30 days while 6 moving in the opposite direction. While none of the analysts made any upward revision over the last 7 days, one of them moved downward.

Magnitude

Given the relative lack of movements, estimate for the fourth quarter has been static over the past week. The Zacks Consensus Estimate for the quarter has been reduced by a penny to 7 cents per share in the last 30 days.

For full-year 2012, estimate decreased by a penny to 24 cents per share over the past week and has reduced by 2 cents 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.

Alcoa 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.

The company trimmed its aluminum demand forecast for 2012 due to slowdown in China. Alcoa is divesting underperforming assets through its restructuring program and is aggressively pursuing cost-cutting actions. Moving ahead, higher demand in the aerospace and automotive markets is expected to drive results. However, weakness across building and construction and commercial transportation markets is expected to continue into the fourth quarter.

Alcoa faces stiff competition from Aluminum Corporation of China Limited and Rio Tinto plc. (RIO - Analyst Report). We currently have a long-term Neutral recommendation on Alcoa, which is in agreement with a short-term Zacks #3 Rank (Hold).  
 

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