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Dow 30 Earnings: Alcoa Inc. - Fourth Quarter 2011
Alcoa (AA – Free Alcoa Stock Report), the largest aluminum producer in the United States and a Dow-30 component, has reported disappointing fourth-quarter results. Although sales advanced approximately 6.0% over the year-earlier period, to $6.0 billion, the top line fell sharply on a sequential basis. The performance reflects an ongoing global moderation in aluminum demand. In particular, Europe's sovereign debt woes and slower economic activity in China has hurt consumption of the metal in key end markets, including packaging, industrial products, and building & construction. The stock’s price was little changed in early morning trading following the report.
The confluence of these factors led to deteriorating conditions in the shiny metal's market, with rising global inventories and falling prices proving overwhelming. Global Aluminum prices on the London Metal Exchange (LME), the world’s largest metal exchange, averaged $2,115 a ton during the December interim, down from a 2011 high of $2,803 reached in May. Due to the decline in aluminum prices, many of Alcoa's smelters operated at unprofitable levels. As a consequence, the company registered a share loss of $0.03 in the December quarter, well below our forecast of a $0.05 profit.
In order to preserve shareholder value, the company has decided to reduce high-cost production, curtailing 12%, or 531,000 tons, of global smelting capacity. The announcement includes the permanent closure of certain plants in the U.S., accounting for 291,000 tons of the measure, with cutbacks at smelters in Europe representing the remainder. This measure did not come cheap, however, leading the manufacturer to take $159 million, or $0.15 a share, in restructuring-related charges during the recent period. Due to the non-recurring nature of the write-down, however, we have excluded the item from our presentation.
Despite the recent performance, management sounded upbeat about 2012. Moreover, the company is forecasting a 7.0% rebound in global aluminum demand, driven by healthy activity in the aerospace (up 8%-12% in volume) and automotive markets (3%-8%). Too, Alcoa is looking for demand from China to remain relatively strong, mitigating sluggishness in Europe. Concurrently, it expects industry wide cutbacks to result in an aluminum supply deficit of 600,000 tons during the new-year. In spite of these conditions, the metal's price has yet to show any signs of stabilizing, approximating $2,035-$2,040 a ton on the LME. Meanwhile, the aforementioned production reduction will probably hurt operations. Taking these factors into account, we have lowered our 2012 top- and bottom-line estimates by $1.36 billion and $0.25 a share, to $24.41 billion and $0.65, respectively.
We remain upbeat about the manufacturer’s long-term prospects, though. Moreover, so does Alcoa, as it reinstated its belief that global aluminum demand will double by 2020, implying a 6.0%-7.0% compound annual growth rate. Leading the way is a growing preference for aluminum in the auto manufacturing industry. In particular, the product's characteristics (light weight and strength) enable car makers to reduce the weight of their cars, increasing fuel efficiency.
About The Company: Alcoa Inc., a Pennsylvania corporation, is a global leader in the production and management of primary aluminum, fabricated aluminum, and alumina combined. It supplies the aerospace, automotive, building and construction, commercial transportation, and industrial markets. It has more than 300 operating and sales locations in over 30 countries. Sales of aluminum and alumina account for more than three-fourths of Alcoa’s total revenues. It also produces nonaluminum products, such as precision castings and fasteners for the aerospace and industrial markets. Alcoa’s operations consist of four worldwide reportable segments: Alumina, Primary Metals, Flat-Rolled Products, and Engineered Products and Solutions.
At the time of this writing, the author did not have positions in any of the companies mentioned.