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Earnings Preview: Alcoa Inc.

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Alcoa Inc. (AA - Free Report) is scheduled to report its second-quarter 2012 results after the market closes on Monday, July 9. The Zacks Consensus Estimate for the quarter is a profit of 6 cents per share, representing a significant year-over-year estimated decline of 80.63%.

With respect to earnings surprises, the company missed the Zacks Consensus Estimate in three of the trailing four quarters while exceeding in one of the quarters. This is reflected in the average earnings surprise of -23.06%.

First Quarter 2012 Synopsis

Alcoa reported earnings of 9 cents per share in the first quarter of 2012, down drastically from 27 cents in the first quarter of 2011. Excluding restructuring charges and other items, Alcoa's profit came in at 10 cents per share, beating the Zacks Consensus Estimate of a loss of 4 cents. However, it was lower than the year-ago profit of 28 cents per share.

Quarterly revenues increased by 0.3% sequentially to $6,006 million and edged up 0.8% over the prior-year quarter. It surpassed the Zacks Consensus Estimate of $5,735 million. The increase was driven by strong results in Global Rolled Products and Engineered Products and Solutions.

Company’s Outlook

For 2012, Alcoa raised its growth forecast for the aerospace market by 3 percentage points to the range of 13% to 14%. The company expects global growth for the automotive sector to be in the range of 3%-7%, commercial transportation in the range of 1%-5%, packaging in the range of 2%-3%, building and construction in the range of 2.5% - 3.5%, and industrial gas turbine in the band of 1%-2%.

The company believes that there will be a deficit in global aluminum supply in 2012 and reiterated its expectation that aluminum demand will grow by 7% globally in this year.

Agreement of Estimate Revisions

In the past 30 days, ten analysts made downward revisions while none of the analysts made upward revision for the second quarter of 2012. In the last seven days, four analysts made downward revision and only one analyst made an upward revision of estimate.

Magnitude of Estimate Revisions

Analysts gradually lower their estimates on Alcoa for the second quarter. The Zacks Consensus Estimate for the quarter has been reduced to 6 cents per share recently from 12 cents in the last 90 days and 8 cents in the last 7 days.

Our Viewpoint

We believe that Alcoa’s outlook depends on the uncertainties in the aluminum market. We are concerned about the volatile prices of aluminum and rising raw material costs. We expect rising energy and raw material (especially caustic soda) costs to continue constraining margin.

Alcoa is also aggressively slashing cost. The company curtailed 390,000 metric tons of its system smelting capacity to improve its competitive position. In the first quarter of 2012, the company announced the permanent closure of the Tennessee smelter as part of its initiative to reduce costs. The company also announced that it will permanently close two of the six idled potlines at its Rockdale, Texas smelter. In addition to the closures and curtailments, Alcoa plans to aggressively accelerate actions to reduce the cost of raw materials used by its Primary Products business and will adjust capacity across the company’s global refining system to reflect internal demand as well as prevailing market conditions.

However, we are optimistic about Alcoa’s long-term growth projects in China, Russia, Jamaica, Suriname, 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 also faces stiff competition from Aluminum Corporation of China Limited and Rio Tinto plc. (RIO - Free Report) . In view of the above stated reasons, 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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