RE: Alcoa Profit FallsAlcoa Won't Be Foiled
By Stephen D. Simpson, CFA
April 7, 2005
Despite its status as the world's leading aluminum producer, Alcoa (NYSE: AA) is still something of an odd duck. Unlike other commodity companies that are reporting 30%, 50%, or even, in some cases, 100% growth, Alcoa's growth during these early years of the commodity bull market has been more moderate.
In part because of the high cost of inputs (like caustic soda, energy, and resins) and the somewhat more moderate spike in aluminum (relative to other metals), Alcoa's boom has been more muted than those of other producers.
That said, this metal giant is still growing, and better days could still be ahead.
Alcoa reported Wednesday evening that revenue had grown 13% in the first quarter. A mix of charges and gains obscures the year-over-year net income picture, but when you attempt to strip those out, it appears that net income grew by a like amount.
During the quarter, Alcoa restarted three smelters, and it expects to restart a smelter in Quebec in the second quarter. Assuming that happens, Alcoa will be operating with roughly 91% of its capacity online. Elsewhere around the world, the company continues to make progress with projects in countries like Russia, Iceland, and Suriname, and all of these efforts should be online by the end of 2007.
Digging a bit deeper into the numbers, Alcoa saw good profit growth in its primary-metals, flat-rolled, extrusion, and engineered-solutions businesses. Stripping out a one-time gain last year, the alumina business also saw good growth.
The only real area of weakness was in the packaging segment, in which results were hurt by high resin and metal costs. This marks the third straight quarter of declining profits in this segment, and results were down about 42% on a sequential basis.
Looking out a bit into the future, there is reason for continued optimism with respect to the aluminum business. While realized aluminum prices for Alcoa have climbed about 15% over the past year, the automobile and aerospace markets (two major consumers of aluminum) have been rather weak.
Although there doesn't seem to be any reason to expect auto sales to markedly improve in the near term, the aerospace market clearly seems on the verge of meaningful recovery. Should that prove true, aluminum demand would increase, and the present tight-supply situation could lead to meaningful price strength for the metal (and its producers).
While Alcoa management believes that the market should stabilize in 2006-2007, that does not mean that a crash is on the way. With supplies still quite tight, it will take at least that long for a new equilibrium to be reached between supply and demand. What's more, China and India aren't going to stop consuming metals as they grow. As such, there should be at least a few more years of healthy market conditions for aluminum producers like Alcoa.