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Mark Vickery

Alcoa Meets, Paints Upbeat View

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The largest U.S. aluminum producer Alcoa Inc. (AA - Analyst Report) swung to a profit in fourth-quarter 2012, buoyed by one-time gains. The company posted a profit (from continuing operation) of $242 million or 21 cents per share in the fourth quarter compared with a loss of $193 million or 18 cents a share reported in the year-ago quarter. The results were boosted by a gain of $178 million ($161 million post-tax) associated with a hydroelectric project asset sale.

Excluding one-time special items, Alcoa earned $64 million or 6 cents a share in the quarter, in line with the Zacks Consensus Estimate. The company’s midstream and downstream businesses delivered profits and its cost-cutting measures also supported the results.

For full-year 2012, Alcoa logged profit (from continuing operation) of $191 million or 18 cents per share compared with a profit of $614 million or 55 cents per share a year ago. Excluding one-time items, the company earned $262 million of 24 cents per share, which missed the Zacks Consensus Estimate by a penny.

Revenues decreased 1.5% year over year to $5,898 million in the fourth quarter, but were ahead of the Zacks Consensus Estimate of $5,579 million. For the full year, revenue declined 5% year over year to $23.7 billion, beating the Zacks Consensus Estimate of $23.28 billion.

Alcoa expects global aluminum demand to grow 7% in 2013, up from 6% in 2012. Its shares rose 2.6% in after-hours trading yesterday.

Segment Details

Alumina - Shipments in the reported quarter were 2.44 million metric tons on production of 4.08 million metric tons. After Tax Operating Income (ATOI) was $41 million, down from $125 million in the year-ago quarter but up from a negative $9 million reported in the sequentially preceding quarter. The fourth quarter results were led by productivity gains and positive London Metal Exchange (LME)-based pricing, partly offset by slower Alumina Price Index-pricing.

Primary Metals - Shipments in the fourth quarter were 0.77 million metric tons versus 0.81 million metric tons a year ago. Production in the quarter was 0.91 million metric tons, a decrease of 5.2% from the year-ago quarter. ATOI was $316 million compared with a negative $32 million in the year-ago quarter and a negative $14 million in the prior quarter.  The sequential improvement was mainly led by the Tapoco Hydroelectric Project asset sale and favorable LME based pricing.

Global Rolled Products - Shipments in the quarter were 0.45 million metric tons compared with 0.41 million in the prior-year quarter. Third-party revenues were $1.77 billion, up 4.7% year over year. The segment posted ATOI of $69 million, up 165.4% year over year but down 29.6% sequentially. Volume declines in packaging led to the sequential decrease, while the year-over-year improvement was attributed to volume, productivity gains and better price and mix. The segment delivered record fourth quarter ATOI and adjusted EBITDA per metric ton.

Engineered Products and Solutions - Shipments in the quarter were 0.05 million metric tons, a 1.95% decline on both year over year and sequential basis. ATOI was $137 million, up 12.3% year over year but down 14.4% sequentially. The sequential decline was due to cost increases and unfavorable volume and price/mix. The year-over-year improvement was mainly driven by productivity gains.

Financial Position

The company ended 2012 with cash and cash equivalents of $1.86 billion, down 4% year over year. Alcoa had a debt-to-capital ratio of 34.8% in 2012, within its 30% to 35% target range. Capital expenditure was $1.26 billion for the year.

Alcoa Reducing Smelting Capacity

Alcoa remained on track to move down the cost curve and curtailed capacities in its upstream business. The company completed partial curtailments of 531,000 metric tons, or 12%, of its highest-cost system smelting capacity. The curtailments will improve the competitiveness of the company’s Primary Products business.

Outlook

Alcoa is optimistic for 2013 and expects global demand for aluminum to increase 7%, up from a 6% growth in 2012. The company continues to see global aluminum demand doubling between 2010 and 2020.

The company envisions 9%-10% global growth in the aerospace sector this year. Its growth forecast for the other markets are – automotive (1%-4%), commercial transportation (2%-7%), packaging (2%-3%), building and construction (4%-5%), and industrial gas turbine (3%-5%).

Our Take

Pennsylvania-based Alcoa Inc. is among the world’s leading producers of primary and fabricated aluminum and alumina. The company competes with Aluminum Corporation Of China Limited and RioTinto plc. (RIO - Analyst Report).

We believe that the company’s cost reduction efforts are, to some extent, offsetting the impact of higher energy and raw material costs on its bottom line. Alcoa is divesting underperforming assets through its restructuring program. The company is making efforts to reduce costs of its upstream business and achieve record profit in its mid stream and downstream businesses.

Alcoa currently retains a short-term Zacks Rank #3 (Hold). We currently have a long-term Neutral recommendation on the stock.
 

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