Alcoa Inc (AA) to Kick off Q2 Earnings Season: Need to Know Basis

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Alcoa Inc (AA) to Kick off Q2 Earnings Season: Need to Know Basis
By Alcoa (http://www.brandsoftheworld.com) [Public domain], via Wikimedia Commons

with cash costs expected at $276/ton (+5% QoQ), this implies EBITDA of $116m (-5% QoQ). We expect to see primary metals sales of 715k tons (+1% QoQ) at a realized aluminum price of $1.00/lb (-8% QoQ) and cash costs of $1.00/lb (+5% QoQ), giving EBITDA of $15m (-92% QoQ). Flat Rolled volumes expected to increase ~6% QoQ on aerospace and automotive demand and we anticipate EBITDA coming in at $198m (+10% QoQ). We forecast a 6% increase in Engineered Products revenues driven by continued productivity improvements, with EBITDA up 1% QoQ to $300m.

Market likely to focus on Alcoa’s forecasts for global aluminum trends, progress towards the Ma’aden smelter and rolling mill launch targeted for 4Q13, as well as direction of Alcoa’s net debt position (DBe at $7.7bn, +$280m QoQ).

Michael F. Gambardella of JPMorgan Chase & Co. (NYSE:JPM) on Alcoa

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We are downgrading Alcoa Inc (NYSE:AA) to Neutral from Overweight, establishing a $9 December 2014 price target, and reducing our estimates to reflect our metal strategists’ lower aluminum price forecasts. Alcoa has clearly taken steps to lower its costs in its upstream segments (Alumina and Primary Metals) and to grow its downstream businesses (Global Rolled Products and Engineered Products & Solutions). However, we believe these efforts will be largely overshadowed by a persistently weak aluminum price environment, which should weigh on AA’s earnings and stock price. Additionally, outside of aluminum prices materially increasing or investor sentiment on the sector significantly improving, we see few catalysts for Alcoa’s stock in the near term.

New aluminum price forecasts. Our metal strategists recently lowered their 2013 aluminum price forecast to $0.89/b from $0.94/lb and 2014 forecast to $0.93/lb from $1.06/lb (for more details on our metal strategists’ updated aluminum price forecasts, please click here). While global demand growth for aluminum continues to be solid, supply growth is outpacing it, which should continue to put pressures on prices. We would note that the aluminum price currently sits at $0.81/lb.

Lowering 2013E and 2014E EPS. As a result of these lower aluminum price forecasts, we are reducing our 2013E EPS to $0.29 from $0.57 and 2014E EPS to $0.55 from $1.04. Our 2Q13 estimate is going to $0.04 from $0.14 and is
based on an average aluminum price (with a 15-day lag) of $0.84/lb. Additionally, we would note that AA’s earnings would likely fluctuate around breakeven at current aluminum prices of $0.81/lb.

PT at $9. We are establishing a December 2014 price target of $9, which replaces our previous December 2013 price target of $12. Our new PT is based on a 2014E EV/EBITDA multiple of 7.0x (previous target based on 6.5x our 2014 EBITDA), which compares to AA’s average forward multiple of 7.4x since 2002. However, given aluminum prices currently sitting at $0.81/lb and the execution risks for the company’s cost reduction and growth initiatives, we believe a discounted multiple should nonetheless be applied to our 2014 estimates.

Aldo Mazzaferro of Macquarie on Alcoa

We mark-to-market our 2Q aluminum and alumina price assumptions, resulting in a reduction in our earnings estimate to 7-cents from 11-cents.

Impact

Aluminum prices have remained under pressure during 2Q, reflecting concerns about a softening China and new capacity weighing on prices. Accordingly, we lowered our 2Q aluminum price estimate by $141/mt, to $1,859/mt.

Aluminum physical premiums remained strong during 2Q, with low financing rates and limited LME load out volumes supporting physical premiums despite the oversupply in the market. We increased our physical premium to $258/mt, up
$8/mt from our original estimate.

We estimate reduced aluminum prices, net of a higher physical premium, resulted in a 4-cent counter-seasonal decline in EPS compared to 1Q.

The appreciation in the US dollar is likely to help Alcoa Inc (NYSE:AA)’s earnings in 2Q, with the corresponding decline in AUD, BRL and CAD currencies adding 2-cents to EPS.

We remain with below consensus estimates for 2013 and 2014, and expect further reductions in consensus estimates near term as aluminum cash prices are likely to remain around $1,700 for the second half of 2013.

AA will report earnings on Monday, July 8th after the market closes and hold a conference call. We will comment further and review our estimates at that time. Earnings and target price revision

We lower our 2Q13 EPS estimate to 7-cents from 11-cents (down 36%) and lower our FY13 EPS estimate to $0.32, down from $0.36 (down 11%).

David Lipschitz of CLSA on Alcoa

$0.09 to account for lower-than-forecast LME pricing in the quarter. LME prices have averaged $0.84/lb, lower than our previous estimate of $0.88lb, which lowers our estimate, while this is partially offset by currency gains from a strengthening US$ vs A$. Our 2013 estimate moves down accordingly to $0.37 from $0.40, while we maintain our $6 target price and SELL rating. Prices depressed, inventory levels slightly better since start of year In the second quarter, aluminum prices have averaged $0.84/lb (on a 15-day lag) after averaging $0.92/lb during the first quarter, with most recent pricing at $0.82/lb. While prices remain depressed, premiums have actually stayed elevated at 11.75 cents/lb, which Alcoa should be able to capture.

LME inventory levels are at 5.2mmt, basically flat from the beginning of the year, while Shanghai inventories are at 426kmt, down 5% from the beginning of the year, but still up 33% YoY. There have been some bright spots in the aluminum market as some production cuts have been announced out of China, however demand still lags which could keep prices from rebounding too much. Apart from Chalco’s 380ktpa capacity cut last week, three other big smelters also announcedm production cut in June, totally 700ktpa capacity will be affected plus Chalco. There has been some speculation in the media that China Non-Ferrous Industry Association (CNIA) held a meeting with 15 key domestic aluminum smelters at the end of May, reaching a preliminary agreement on a joint aluminum production cut of 1mtpa.

CRR aluminum: Positive signs, but will be short-lived CRR’s ali semi-panel saw new orders rise MoM and YoY in April. Generally, they expect orders to continue rising MoM in May, largely thanks to home decoration demand as well as home appliances purchase brought forward before the energy-saving subsidy program comes to a close at the end of May. As CRR was expecting, inventory at major warehouses began to fall MoM in April and is likely to keep on falling till the end of 2Q13. But, in 3Q13 when ali processing enters the low season and 1m tonne of new ali capacity comes on stream, inventory will come under pressure again.

H. Fraser Phillips of Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) on Alcoa

We estimate Q2/13 EPS will be down from Q1/13, as lower prices more than offset increased production in the upstream segments and ATOI increases in the downstream Global Rolled Products and Engineered Products and Solutions segments.

Key Points:

• Q2/13 results expected to be significantly weaker sequentially: We have increased our Q2/13 estimate slightly to account for the more favourable impact of currencies than we were previously expecting. We are now forecasting a Q2/13 EPS of $0.06 versus Q1/13 EPS of $0.11 and Q2/12 EPS of $0.06. Consensus is $0.09. See Exhibit 2 on page 3.

• Weaker aluminium prices a negative: On a 15-day lag basis, LME prices were down $0.08/lb, which should result in a $0.09 decrease in EPS versus Q1/13.

• Currency movements should have an offsetting beneficial impact: Strength in the USD versus the CAD, EUR, AUD, BRL and NOK should provide for an increase in EPS of $0.02 versus Q1/13.

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