If Only They Could All Surprise Us Like Alcoa

To a market roiled on Tuesday by European financial nausea, concern about new or ongoing violence in the Middle East, and a wobbly U.S. labor market, you can add a pleasant surprise: Alcoa (NYSE: AA  ) , an aluminum giant and the first Dow stock to arise each quarter, shockingly blew past forecasts for its performance, turning an expected loss into remarkably comfortable earnings.

There are a few often different ways to approach the results of Alcoa or virtually any company. There's the year-over-year approach, which I typically prefer, and which shows that Alcoa's earnings slid from $309 million, or $0.27 a share, to $94 million, or $0.09 a share. Then there's the overdone concern about actual results versus analysts' expectations. As a former Wall Street dart-thrower, I invariably add a shaker of salt to the latter approach, given my belief that the outside forecasters are typically endowed with insufficient information -- especially vis-a-vis the bigger companies -- to allow for to-the-penny reverence for their prognostications.

You can't beat 'em much harder than that
But in Alcoa's case, given the world's economic and geopolitical tremors, along with the importance of its earnings season lead-off spot (with baseball having cranked up its 2012 session just a week ago, I trust you'll indulge me that metaphor), I'm inclined to genuflect in the direction of the company's astounding quarterly beat. Rather than coming in at a dime (excluding items) in the black, Alcoa was expected to lose about $0.04 a share. Revenue, which reached $6 billion, was expected to reach approximately $5.77 billion.

Furthermore, the company was able to check in with its surprisingly positive results in the face of being buffeted by a combination of declining aluminum prices and increasing energy costs. Whereas you'd have forked over about $2,500 for a ton of aluminum a year ago, these days you could walk away with a $2,050 deal. You no doubt have your own sense of the hike in fuel levies since early 2011.

But there was more positive news than any of us might have anticipated. From a top-down perspective, CEO Klaus Kleinfeld noted, "Performance rebounded strongly this quarter due to our proactive cash sustainability actions, our relentless focus on profitable growth, and stabilizing markets." He then cautioned, "Challenges remain in this economy, but we approach them better prepared than ever before."

Palpable excitement
During his post-release call, Kleinfeld, referring to a slide, excitedly noted the "profitability that we see in the first quarter. I mean, look at that, $430 EBITDA per metric ton. The 10-year average is $235 ... and you see how it sticks out. It's really an outstanding performance."

In the key end markets for aluminum, Alcoa clearly benefited from a 32% year-over-year improvement in revenues from commercial transportation, 15% more from aerospace, and a 7% higher injection from the recovering automotive sector. The naysayers were industrial products, whose revenues dipped by 14%, and building and construction, which suffered a 5% revenue pullback.

As for the company's individual sectors, the results were somewhat more mixed. After-tax operating income from alumina plummeted 75% from the comparable quarter a year ago, while primary metals were even harder hit by the aluminum price drop, ringing up $10 million in ATOI, compared to $202 million in the first quarter of 2011. Conversely, ATOI from global rolled products expanded to a record $96 million, a 19% year-over-year improvement and precisely the same related gain recorded by engineered products and solutions.

More ups than downs
Looking ahead, management hasn't backed off its expectation that 2012 global aluminum supply will fall short of an anticipated 7% increase in demand. For 2011, demand growth reached 10%.

Looking specifically at geographic demand forecasts, the company expects demand from China to reach about 11% this year, versus an earlier 12% expectation -- a directional slowdown of the sort that clearly has the world in a dither relative to most natural resources and metals.

At the same time, Kleinfeld noted an expectation that North America, Brazil, India, and Russia will also show growth patterns. And as I've noted to Fools in the past, assuming it behaves itself, Russia's entry into the World Trade Organization this summer could induce more than a minor benefit for trade trends that are so important for the global economy.

Foolish bottom line
With Alcoa having led off with at least a stand-up double, I'll now focus on two smaller aluminum producers, along with a couple of other companies whose results I consider to be especially significant. Kaiser Aluminum (Nasdaq: KALU  ) and Century Aluminum (Nasdaq: CENX  ) are both lined up to report on April 25, with Kaiser expected to post strong results, while Century is forecast to use a portion of its red ink allotment.

As for my two non-aluminum, non-energy focuses, Freeport-McMoRan Copper & Gold (NYSE: FCX  ) , while typically a company I watch with all four of my eyes, will be massively affected by the labor difficulties from which it is just now emerging. That allows for an attention shift to giant equipment manufacturer Caterpillar (NYSE: CAT  ) , which likely will steal center stage from the two small aluminum companies with a stellar performance, also on the 25th.

As for Alcoa, while I'm fresh out of baseball metaphors, I trust you'll agree that its stronger-than-expected performance merits a spot for the big company on your version of the Fool's My Watchlist. Just click here.

 Fool contributor David Lee Smith doesn't have financial interests in any of the companies named in the article above. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.   

 


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