Alcoa (AA) Posts a Surprising Profit, Defying Bearish Expectations

Aluminum producer Alcoa (AA: Charts, News) kicked off earnings season on Wall Street on Tuesday, reporting a massive improvement over its previous quarter and forcing analysts to rethink their bearish sentiments. Alcoa reported its first quarter earnings on a dark day for the major indices, as the markets continued a 5-day losing streak due to Spanish debt, Chinese inflation and American employment numbers.

The New York-based Dow component reported a profit of 9 cents per share, or $94 million, which was down from its profit of $308 million in the prior year quarter, but much higher than its loss of $191 million in the fourth quarter of 2011. Analysts had expected Alcoa, which is considered an industry bellwether for raw material companies, to report a loss of 4 cents per share. Alcoa attributed its gain to stabilizing markets and rising demand from end-product customers.

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Alcoa, like many non-precious metals producers, has been in a slump ever since the global financial crash of 2009. Shares now trade at less than a fifth of its all time high of $47.35 in 2007. Shares have declined 48% over the past twelve months, despite improvements in the overall market. The 120-year old company, which is the world's fourth-largest aluminum producer, has been squeezed by rising operating costs and depressed prices. In January, Alcoa reduced its global aluminum-smelting capacity by 12% in an effort to increase its negative profit margins. Looking ahead, Alcoa raised its fiscal 2012 global growth forecast for the aerospace, automotive, transportation, packaging, construction and industrial gas turbine markets.

Alcoa claimed that global aluminum demand would rise by 7% for the year. It notably trimmed its growth outlook for China by a single percentage point to 11%, still higher than most analysts' forecasts. China's property sales have declined 30% year-on-year, causing significantly lower demand for metals and other commodities.

Since Alcoa's fabricated aluminum is used across so many sectors, its outlook is considered an accurate forecast of global economic health. "Challenges remain in this economy," stated CEO Klaus Kleinfeld, "but we approach them better prepared than ever before." Over the past year, Kleinfeld's performance-based yearly bonus has fallen 45% along with Alcoa's stock.

Alcoa's strong results hint that the upcoming earnings season may not be as bleak as many analysts expect. It may also breathe life back into commodity stocks, which have been beaten down by a downbeat forecast in demand from China, the world's largest importer of raw commodities. China reported that imports of refined metal, copper alloy and overseas products decreased from February to March, which sparked a massive sell-off in metal stocks. Copper futures were especially hard hit, tumbling to three-month lows on the news. China's explosive growth has also fueled the growth of the Australian and Canadian stock markets, which are dominated by mining and raw material stocks. Aluminum prices have declined nearly 20% from the previous year, but have bottomed out and slowly risen from $2,020 per tonne on January 1 to $2,126 per tonne on March 31.

While Alcoa's profit is a bullish catalyst in an increasingly bearish market, investors should be aware that the unfolding Spanish debt crisis and slumping American employment figures could continue to depress the market. Alcoa can be considered a deep value stock, trading at 9.7 times forward earnings with a 5-year PEG ratio of 0.95. Historically, the stock has never been cheaper, but it's going to be a bumpy ride back up, with the stock highly vulnerable to macro factors rather than micro ones.

Other News About AA
Alcoa Inc. Downside Risk Remains Despite Soaring Shares On Surprise 1Q Profit
Alcoa remains a risky bet despite strong earnings.
US stocks rebound after Alcoa's robust results
Alcoa props up Wall Street after Tuesday's rout. Other Stocks in the News
Starbucks To Triple China Workforce, Stores In 3 Years
Starbucks expands strongly into China.
Yum Brands CEO David Novak sees jump in compensation
Yum's CEO's pay soars along with the company's strong stock performance.

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Published on Apr 12, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2016. Content published with author's permission.

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