Friday, April 8, 2011

Alcoa (NYSE:AA): An Earnings Preview

The faltering economy and soaring commodity prices are finally cutting into unjustified optimism in the market, taking something away from the unofficial start of the earnings seasons with Alcoa's (NYSE:AA) earnings report on Monday.

More than likely Alcoa will have a super quarter to report, but things have changed so much that the only element investors are seemingly, and rightfully interested in is guidance.

The biggest concern going forward is whether or not Alcoa will be able to take advantage of rising aluminum prices when at the same time raw-materials inputs and transportation costs are rising. That's not a guarantee any longer.

So while demand has been and will be stronger, margins and earnings could come under extreme pressure, negating the value rising prices and increased demand, which under normal economic conditions would be a big boon for Alcoa and the aluminum industry.

So the projected 12 percent boost in aluminum consumption has yet to be proven to be a positive for Alcoa. The one good thing is they were able to cut back on costs during the recession, resulting in a leaner company, which should help it going forward.

Even with Alcoa's 12 percent projection, that's no longer a guarantee, as rising gas prices and fuel costs in the airline and automotive industries, which are among the company's major customers, are undergoing extreme stress at this time, with no clue as to how long it'll last.

That includes the parts shortages because of the earthquake in Japan as well as declining numbers of passengers on airlines, which could have an effect on capex. That could be bad news for Alcoa.

The major problem Alcoa faces is just about every key market it serves is back to undergoing stress, including construction and the industries already named above. Consumer spending appears to be stronger, but that could, and probably will, slow down as gas prices go up or remain level.

All this has been said to reiterate the fact that the performance of Alcoa last quarter has already lost its thunder, and the expected earnings of 27 cents a share and $6.16 billion in sales, even if the company exceeds it, which they could, will be a bittersweet victory for it.

The bottom line for Alcoa is what appeared to be a surety of terrific growth and earnings just a short time ago for the next couple of years, has suddenly and quickly changed into a complete uncertainty.

It'll be interesting and vital to hear what the company says about the impact of events and costs on those sectors of the market it serves on guidance.

Alcoa was trading at $17.82, falling $0.30, or 1.66 percent, as of 2:58 PM EDT.

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