Wednesday, October 9, 2013

Alcoa to the Dow: How Do You Like Them Earnings?

Just about a month ago, Alcoa (AA) was booted from  the Dow Jones Industrial Average for being too ugly, too out of shape, and for letting its mother dress it funny. Or something like that.

Well, Alcoa got its revenge last night. It reported a profit of 11 cents a share, not excluding special items, beating analyst forecasts for a 6 cent profit, and also said it still expects aluminum demand to grow by 7%.

Shares of Alcoa have jumped 4.3% to $8.28 today at 1:26 p.m, which would have made it the Dow’s best performer today instead of AT&T (T) and its 2.8% gain. Still it’s hard to complain too much today as the Dow’s three new members are having solid, if not extraordinary, days. Nike (NKE) has jumped 1.3% after its CEO told analysts that his company could have $30 billion of sales in 2015 and $36 billion by 2017. Goldman Sachs (GS), meanwhile, has gained 1.3% to $155.04 and Visa (V) has advanced 0.8% to $183.98.

Analysts, however, aren’t jumping on the Alcoa bandwagon. Cowen’s Anthony Rizzuto notes that Alcoa’s beat was driven by cost cutting. He writes:

In the first three quarters, Alcoa’s cost savings totaled $825MM, running well ahead of the $750 million annual target. Operating efficiencies enabled AA to offset the lower realized aluminum prices which were down 3% q/q. Despite the tough market environment q/q, the company was able to improve bottom line results. Separately, as of the end of the quarter, 274K mt of the 460K mt of smelting capacity that is currently under review has been closed or curtailed. However, in our view, the aluminum market struggles with bloated inventory even as an estimated approximately 50% of production currently operates unprofitably.

JPMorgan’s Michael F. Gambardella and team raised their price target for Alcoa to $10 from $9 but said that such cost cutting probably can’t continue to outweigh falling aluminum prices. “We remain Neutral on the stock, however, as we think further efforts to reduce its costs in the upstream and grow the downstream will be hampered by a weak aluminum price environment over the next several years,” they write.

Barclays’ David Gagliano, meanwhile, highlights all the “buts” in the earnings beat:

AA delivered better-than-expected Q3 results, as the primary metals segment benefited from stronger-than-anticipated pricing vs our estimates. However, the forward-looking headwinds remain, even before considering the aluminum price, including: a) falling regional premiums that are not yet reflected in AA's results (a timing issue); and b) softness in AA's downstream segments, where Q4 commentary suggests approximately a 15% decline in overall downstream results (combination of seasonality & high aerospace OEM inventories). The end result, no change to our estimates or our views on Alcoa, despite the solid Q3 results. Even with the strong Q3, Alcoa is generating annualized EPS/EBITDA of $0.44/$2.7b, translating to a stock trading at 18x EPS and 7.0x EBITDA, with more downside potential than upside to the quarterly trends, in our view.

But for one day, at least, Alcoa can call itself a winner.

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