Alcoa's Results Indicate Softening Metals

You may not realize that the return of the swallows to Capistrano is nowhere near as dependable as in times past, given that the avian creatures are now just as likely to set down in less urbanized areas. Fortunately, the powers that be at Alcoa (NYSE: AA  ) , the big aluminum manufacturer, have proved to be far more steady, leading off the new earnings season as they typically do for the major companies.

For the Pittsburgh-based company, the results were a combination of improvement and disappointment. Its net income increased to $172 million, or $0.15 per share, compared with $61 million, or $0.06 per share, for the third quarter of 2010. Backing out restructuring costs and tax benefits reduces the per-share earnings by a penny, well below the $0.22 anticipated by the analysts who follow the company. Revenues for the quarter were $6.4 billion, 21% above the comparable year-ago quarter, but 3% sequentially below the second quarter of this year.

With regard to the quarter-over-quarter dip, CEO Klaus Kleinfeld said, "Aluminum prices fell in the third quarter, but most markets continued to grow. With the exception of Europe, we saw growth in our end markets, though at a slower rate than in the first half, as confidence in the global recovery faded."

At the same time, given the decline in prices, Kleinfeld expressed an expectation that the slowdown would continue for the remainder of the year: "We continue to forecast a growth rate of 12% for 2011, with a slower pace in the second half of the year. ... Alcoa is a confident company in a nervous world. We are well prepared for whatever lies ahead."

On a segment basis, after-tax operating income (ATOI) for Alcoa's Alumina operation was up 120% year over year but declined 17% sequentially. ATOI for Primary Metals increased 41% from a year ago but declined 45% sequentially. At the same time, Flat-Rolled Products experienced a 9% ATOI decline from the year-ago quarter and a 39% sequential reduction. The Engineered Productions and Solutions segment expanded its ATOI by 21% from the third quarter of 2010 but saw a 7% reduction from the second quarter of 2011.

Obviously, the across-the-board sequential slide bodes ill for the economy in general and metals prices specifically. Nevertheless, with but one company having reported thus far, we'll know more about prospects for the sector when two smaller aluminum producers, Kaiser Aluminum (Nasdaq: KALU  ) and Century Aluminum (Nasdaq: CENX  ) , recount their results on Oct. 24 and 25, respectively. Further, given the degree of substitution between aluminum and copper, Freeport-McMoRan Copper & Gold (NYSE: FCX  ) will add another dimension to our picture on Oct. 19.

In the meantime, given the concerns generated by its third-quarter slide and its significance as a bellwether of the economy, I'm inclined to gain assistance in monitoring Alcoa by adding the company to my individual version of My Watchlist.    

The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days.

We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't own shares in any of the companies named in the article. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 14, 2011, at 12:54 PM, JAVEROA wrote:

    Alum is an energy intensive business, which is why VALE lowered its participation.

    The fact that Revenues were up does indicate positive outlook as well as their growth projections.

    Now if the company is not making that much money, we should look at their costs, not interpret it as a trend for commodity prices.

    Companies are doing well, it is the politicians who have no idea where the economy is going and they are always behind the curve.

    Any 1st year economics student would have told you that the premature tightening by ECB (raising interest rates) was to have the outcome we are seeing.

    I suggest everyone read a brief summary of what caused Great Depression and how authorities mishandled it when it was just rebounding.

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