Wednesday, July 13, 2011

Alcoa's earnings and the global economy

Alcoa (AA), the largest aluminium producer in the world is broadly viewed as one of the barometers of the global economy. Analysts often look at AA's earnings release for some hints of economic conditions.
The second quarter report was no exception. The shares price of AA fell about 2% preceding the release and did very little  after it.

Bulls on the global economy may have found assurance from AA's forecast. For the year, Alcoa projects aluminum demand to grow 12% on top of the 13% growth witnessed in 2010. What is better is that the optimism is broad based, including aerospace (7%), automotive (4-8%), commercial transportation (7-12%), packaging (2-3%), building and construction (1-3%), and industrial gas turbines (5-10%).  According to Alcoa, aluminum demand would double by 2020 from 2010 on 6.5% annual growth.

By segments,

Alumina - The shipments  increased 11.8% year over year to 2.4 million metric tons on production of 4.1 million metric tons.  The price of alumina jumped 7%.

Primary Metals - Shipments were 0.7 million metric tons, almost flat with the previous-year quarter. Pricing improved. Production increased by 5% year over year to 0.9 million metric tons.

Flat-Rolled Products - Shipments jumped 24.8% year over year to 0.4 million metric tons. Both Russia and China continued to see positive trends. Besides, third-party volumes were up 41% in Russia and 30% in China compared with the second quarter of 2010.

Engineered Products and Solutions - Shipments surged 23.9% year over year to 0.57 million metric tons. The segment’s strong results were marked by new product developments and productivity improvements.

Obviously all the above results were partially offset by higher energy and raw material prices.

Not everyone shared the optimism. Citigroup analyst, Brian Yu lowered his 2011 earnings estimate to $1.21 from $1.25 per share and his 2012 estimate to $1.35 from $1.43, citing higher-than-expected input prices. Yu estimates that cash costs in the company's primary metals group averaged $1.11 per pound in the second quarter. He notes that if other producers are seeing the same high prices, then current aluminum prices are too low to offset them. He believes these cost pressures are continuing in the third quarter.

My takes:
AA's earnings release echoed another economic bellweather Fedex (FDX)'s earnings release that indicated that impacts on profit margins were contained. However, if oil prices stay stubbornly above $80 for the rest of the year, smaller companies that do not have global presense may not be in the same shoes.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own any of the above positions in her personal account as of July 13, 2011

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