Alcoa Earnings Preview: Falling Premia To Weigh On Results

Alcoa Earnings Preview: Falling Premia To Weigh On Results
By Alcoa ( [Public domain], <a href="">via Wikimedia Commons</a>

Alcoa is scheduled to release its second quarter earnings report after closing bell tomorrow. Shares of the aluminum manufacturer slipped in early trades this morning, falling as much as 3.85% to $10.60 per share. In general, analysts aren’t expecting tomorrow’s earnings report to be great.

What to expect from Alcoa’s earnings report

Deutsche Bank analysts Jorge Beristain and his team believe Alcoa will post adjusted earnings of 24 cents per share, which would be a 14% quarter over quarter decline. The FactSet consensus estimate is earnings of 23 cents per share.

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The reason for the expected decline is because the lower realized aluminum price is expected to be 9% lower at $1 per pound. According to the Deutsche Bank team, Premia is also expected to decline sequentially to a weighted average of 13 cents per pound.

Reported earnings are expected to include restructuring charges in connection with the power station in Anglesea and the aluminum smelter in Pocos De Calda. The Deutsche Bank team is expected EBITDA of $909 million, a 17% sequential decline.

Expectations for Alcoa’s divisions

They’re looking for Alumina cash costs to climb 24% sequentially to $238 per ton and EBITDA of $219 million for the segment. The analysts expect sales of primary metals to fall 6% quarter over quarter to 555,000 tons, cutting EBITDA for the segment to $264 million.

In Alcoa’s Global Rolled Products division, they’re expecting EBITDA to increase 8% sequentially to $135 million. They’re also expecting an increase in Engineering Products and Solutions EBITDA due to gains in market share.

RTI Metals acquisition expected to close this month

The Deutsche Bank team expects investors to be focused on Alcoa’s acquisition of RTI Metals, which is expected to close this month. The deal was worth about $1.5 billion, with $1.3 billion of that coming in stock. Since the announcement of the acquisition in March, shares of Alcoa have tumbled, falling 23%, which cut the acquisition price to about $1.2 billion.

Additionally, they want to hear more about the Firth Rixon acquisition, Alcoa’s expectations for global aluminum trends, and more curtailments on the company’s smelters and refineries.

Things may get worse for Alcoa

Nomura analyst Alexander Burnes cautions investors that things may get worse before they get better at Alcoa. He cut his adjusted earnings per share estimate from 24 cents to 21 cents per share and his EBITDA estimate from $960 million to $913 million. He thinks the first quarter might have been Alcoa’s high point for the year in upstream earnings.

He noted that physical premia pricing has declined about 75% since the beginning of the year and hasn’t yet fully impacted Alcoa’s quarterly earnings. This is because European premia are behind by 45 days, and in the Midwest, the lagged average premium is about 7 cents per pound higher than spot levels. Alcoa said in its last earnings report that it expected an impact of -$65 million from premia in the second quarter.

Burnes cut his price target for Alcoa to $14 per share but reiterated his Buy rating ahead of tomorrow’s earnings report.

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