Alcoa Kicks off Q1 Earnings, Analysts Universally Bearish


Alcoa Inc (NYSE:AA) kicks off earnings season on Apr 8th.  Overall, the earnings season is expected to be tough one. Profit margins are at highs, employment numbers are not great, more problems in Europe, the weather, and any other excuses will be used by companies to justify bad performance. Analysts are almost universally bearish on Alcoa Inc (NYSE:AA) (which could be a contrarian indicator), which is considered one of the bellwether companies, and the first major firm to report Q1 earnings. Below we have highlights from some of the major firms and what they expect to see Monday when the company reports.


We forecast Q1 EPS of $0.08, below consensus at $0.09. LME prices have declined to $1,846/t from $2,100/t in mid-Feb amid oversupply, regulatory uncertainty, and softer H2 Chinese growth. Our $9 PO now uses 7-7.5x 2013-15E EV/EBITDA from a previous 7-8x average. Credit downgrade possible given worsening Q1 debt metrics We believe aluminum producer Alcoa could have its credit downgraded by Moody’s Corporation (NYSE:MCO) to junk status after Q1 earnings on Monday as credit metrics are likely to deteriorate q/q. We forecast net debt rising to $7.5B from $6.9B in Q4 and net debt to cap of 34% from 32% in Q4 as working capital should drain cash. Alcoa has said it targets $6.8-7.1B of net debt and a 30-35% net debt to cap ratio. 

Deutsche Bank 

We expect Alcoa to report adjusted diluted EPS of 6c in 1Q13 flat vs. adj. 6c in 4Q12, after marking-to-market this quarter’s aluminum pricing. Despite an estimated sequential $52m EBITDA improvement (on SG&A and R&D), expected flat EPS QoQ is largely due to equity income loss (Ma’aden start-up) partly offset by lower taxes. LME aluminum prices inched up +1% to 92c/lb (@ 15 day lag QoQ through March 15), but we anticipate lower aluminum premia of ~14c/lb (-0.5c/lb QoQ). Hence, core earnings likely to remain stable on relatively flat realized aluminum pricing QoQ. Our 1Q13E EPS of 6c is 3c below FactSet consensus of 9c (-3c in past month). 

RBC Capital

We are marking to market AA’s 1Q estimate to $0.08. Caustic price decline, productivity or downstream could be potential drivers of a beat. Spot aluminum at $0.85/lb indicates downside risk to 2Q13e. Downstream earnings should provide support to Alcoa Inc (NYSE:AA) shares vs. pure aluminum plays. MS Our View: We expect another weak quarter from Alcoa. We estimate Q1/13 EPS will be down slightly from Q4/12, as higher costs and lower production/shipments in Alumina and Primary Metals more than offset higher aluminium prices and improved operating results in Global Rolled Products and Engineering Products and Solutions. 


We have lowered our 1Q estimates for Alcoa Inc (NYSE:AA) and NOR based on lower than expected LME pricing as well as NOR’s recent debt refinancing. AA is scheduled to announce results after the close on April 8 and we expect a sequential improvement in earnings to $0.08 vs consensus of $0.10. On a 15-day lag basis, LME aluminum pricing improved by a modest $0.01/lb QoQ to $0.92/lb but spot pricing has fallen to $0.85/lb as production and exchange inventories continue to grow. The cost curve suggests that over half of global smelters are uneconomic at spot and roughly a quarter are uneconomic if we include a high merchant premia of ~$0.10/lb. Yet production continues to grow, primarily from China. 

We are lowering our 1Q13E EPS to $0.08 from $0.14 primarily to reflect lower than expected realized aluminum prices. We are maintaining our estimates for the remainder of 2013 for now, but note that they are based on aluminum prices meaningfully higher than current levels.


What we will be looking for: In the company’s upstream segments (Alumina and Primary Metals), we will be looking to gauge how the company’s efforts at reducing costs are progressing. 4Q12 margins on the downstream side (Global Rolled Products and Engineered Products and Solutions), were weaker than we expected, with seasonality taking a bigger than expected toll. On its 4Q12 call, Alcoa Inc (NYSE:AA) guided for ATOI to improve in both segments by roughly 10-15%, and we will be looking to see if margins rebound back towards the higher levels exhibited throughout most of 2012. 

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