lets do a share swapAlcoa lowers earnings expectations
Hurricanes and energy blamed for weak outlook
By Jim Jelter, MarketWatch
Last Update: 7:02 PM ET Oct. 6, 2005
SAN FRANCISCO (MarketWatch) -- Alcoa Inc., the world's biggest aluminum producer, will kick off the third-quarter earnings season after the closing bell Monday with a litany of storm and energy-related woes likely to be repeated by most of the industrial sector.
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FinancialsMore AAnews, chart, profile) , at the front end of the Dow Jones Industrials Average earnings lineup, has already primed investors for weaker results.
Hurricane Rita, which forced Alcoa to shut its alumina refinery at Point Comfort, Texas and anode plant in nearby Lake Charles, La, is singled out for special blame, meriting a warning to investors late last month and raising questions about the duration of the shutdowns and their impact on fourth-quarter results.
But severe weather is only one of a series of setbacks, most tied to commodity prices and the economy, prompting the company to trim its third-quarter results forecast to 27 cents to 31 cents a share, down sharply from Wall Street's pre-storm estimate of 44 cents.
Analysts polled by Thomson First Call after the warning expect the Pittsburgh-based company to post earnings of 29 cents a share for the quarter, down from 34 cents a year ago, on revenue of $6.61 billion.
Since a mid-August high of $29.77, Alcoa's share price has tumbled 23%, closing Thursday at a 52-week low of $22.73, leaving plenty of room for improvement. A year ago, Alcoa stock traded at $34, a level untouched in 2005.
"This quarter, we are squeezed between a weaker upstream pricing environment and significantly higher energy and input costs," Alcoa CEO and Chairman Alain Belda said in a Sept. 22 note.
Input prices refer to raw materials like alumina and bauxite and the energy used to turn them into finished product. Aluminum smelters, among the most energy-intensive industrial facilities in the world, are suffering from a staggering 50%-plus rise in energy prices this year.
Analysts also see alumina prices remaining high through next year, when supplies are seen starting to build a surplus.
Alcoa has also cited weak demand in Europe and the automotive industry as factors cutting into earnings.
To gauge Alcoa's response to the tougher business cycle, investors will be looking at its third-quarter report for an update on the second phase of its 2005 restructuring plan. The plan aims to cut about 8,100 jobs worldwide and trim $195 million from its cost base.
Meanwhile, weakness in the underlying global metals markets continue to weigh heavily on Alcoa's profit margins.
Aluminum prices on the London Metal Exchange are down $80 per metric ton over the past three months with an additional $40 per metric ton drop in the premium for Midwest deliveries.
Aluminum fell $4 to close Thursday in London at $1,858 a metric ton.
Analysts point to continued strong exports from China as a major damper on prices.
"We remain concerned about the escalating aluminum production levels from China against the backdrop of slowing global consumption levels," Longbow Research analyst Christopher Olin said in a note.
"We do not see any indication that China has been successful in their efforts to curb aluminum supply to implement the export tax (note the recent 20-21% growth in Asian supply). That said, we believe there are more interesting metal investment opportunities at this time," he added.
Longbow Research has a neutral outlook on Alcoa stock.
BB&T Capital Markets analyst Lloyd O'Carroll, summarizing a recent Metal Bulletin Aluminum Conference in Atlanta, said the greatest uncertainties facing Alcoa and the rest of the sector are the health of the U.S. economy and energy prices - especially record-high natural gas prices -- after Hurricanes Katrina and Rita.
BB&T has a buy recommendation on Alcoa with a target price of $23.87 a share, with support from the aerospace industry and an expected uptick in demand for can sheet aluminum in 2006 offering a glimmer of better times ahead.
Jim Jelter is Industrials Editor for MarketWatch in San Francisco.