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

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Alcoa Inc (NYSE:AA) kicks off the earnings season after the market close on Monday July 8th. The company’s earnings is considered by many the ‘official’ start of the Q2 quarter. Analysts have very low expectations for Q2 and Alcoa Inc (NYSE:AA) is no exception. The consensus calls for $0.10 EPS for Alcoa, down from $0.11 in the prior quarter on lower aluminum prices. Below we bring you pre earnings analysis/forecasts from analysts at eight of the major investment banks.

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

Sal Tharani of Goldman Sachs Group Inc (NYSE:GS) on Alcoa

We have marked to market our second quarter estimates for Alcoa to reflect the actual realized LME aluminum price of $0.84/lb compared to our estimate of $0.91, which reduces our 2Q13 estimate for Alcoa Inc (NYSE:AA) to $0.05 from $0.13. We also lower our full year 2013 estimate to $0.35 from $0.42. We maintain our 6-mo P/E-, EV/EBITDA- and DCF-based target price at $8 and rate Alcoa as Neutral.

Alcoa Implications

The aluminum price has continued to disappoint and see further downside risk. We believe that Alcoa Inc (NYSE:AA) will need to accelerate its plans to idle 460K tons of high-cost smelting capacity announced recently, despite the political, labor, and environmental pressures that may arise from plant closures. AA’s midstream and downstream businesses are on a strong footing, generating two-thirds of its EBITDA in 2012, and its investments in the aerospace and automotive sectors should enhance margins.

However, we think timely execution of the company’s announced strategy to restructure its upstream businesses is required, while also continuing to seek opportunities like Ma’aden to move down the global cost curve. Although we maintain our Neutral rating, we see some near-term risk if AA is downgraded from IG to HY by another credit rating agency after Moody’s recent downgrade, as news articles have speculated that this could increase the likelihood of removal of Alcoa Inc (NYSE:AA) from the Dow 30, potentially triggering a sell-off by index funds. For the 2Q conference call, investors’ focus will likely be on the balance sheet and cash burn – including a possible equity issuance to shore up the balance sheet – in addition to portfolio restructuring, market outlook, and growth projects like aluminum-lithium and auto aluminum rolling facility.

Brian Yu, CFA of Citigroup Inc (NYSE:C) on Alcoa

we are shaving our 2Q estimate to $0.07/sh vs consensus of $0.09/sh based on lower than expected LME spot pricing with some offsets from a stronger USD. Since a weak aluminum market is already known, the focus will center on the degree of cost control and on the company’s downstream operations, where leverage to the stronger automotive and aerospace markets have driven record profits and margins for those business units.

Segment Profits – We are modeling consolidated 2Q ATOI of $304 mln, lower than the $351 mln in 1Q. On an EBITDA basis, the segment total should fall to $792 mln from $838 mln. By segment, we estimate lower Alumina ATOI of $49 mln ($175 mln EBITDA) vs $58 mln ($180 mln EBITDA) in 1Q due to pricing. Similarly Primary Metals ATOI should swing to a loss of $29 mln ($105 mln EBITDA) vs $39 mln profit ($184 mln EBITDA) in 1Q. Downstream should fare much better as AA expects QoQ ATOI growth of 5% for Engineered Products and 15-20% for Rolled Products. We estimate Engineered Products ATOI of $187 mln ($315 mln EBITDA) vs $173 mln ($297 mln EBITDA) in 1Q, and Rolled Products ATOI of $97 mln ($198 mln EBITDA) vs $81 mln ($177 mln EBITDA) in 1Q.

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Summer Slowdown – 3Q is typically a sequentially lower volume quarter, driven by Europe. Thus we are modeling a QoQ ATOI decline of 10% for Engineered Products to $169 mln and 2% for Rolled Products to $95 mln.

Earnings Themes – 1) Progress on capacity curtailments and associated restructuring charges; 2) Continued confidence in hitting the free cash flow breakeven target for 2013 and if the pension funding will still be with cash; 3) Global alumina and aluminum supply and demand outlook; 4) Ramp progress at the Ma’aden JV in Saudi Arabia; and 5) Deeper dive of the $275 mln auto sheet capacity expansion at the TN rolling mill.

Timna Tanners of BAML on Alcoa

Alcoa Inc (NYSE:AA) kicks off Q2 earnings season on July 8. We forecast EPS of $0.06, below consensus of $0.10 and last qtr’s $0.11 largely due to a 8% q/q drop in 15 daylagged LME pricing offsetting seasonal improvement in its mid- and downstream segments. Ex LME and FX, mgmt forecasted Q2’s ATOI to be flat in upstream (alumina and aluminum), up 15-20% in rolled products, and up 5% in Engineered Products & Solutions. We expect mgmt to focus on its cost-cutting initiatives and productivity improvements on the call, elaborating on potential smelter closures after it said early in May it would review 4-5 smelters for possible closure. High leverage to LME price; warehousing concerns in focus Greater expectations of rising interest rates have caused trepidation over the sustainability of prevailing elevated LME warehouse aluminum supplies.

Already LME Al pricing has softened as the regional U.S. premium reached an all-time high of $0.12/lb, We think substantial price recovery is unlikely over the next 2-3 years and we tested valuation and debt metrics at $0.05/lb increments from
$0.70-0.95/lb (page 3). Every $0.05/lb change in LME price is $430-480M of EBITDA, $0.20-0.25 of EPS, and $280-330M of FCF ex Ma’aden costs. Several levers to pull in a sustained-low price scenario To lessen cash burn in a weal Al price scenario AA can: 1) cut its $550M of growth capex, 2) pay pension costs with stock vs. cash, 3) sell non-core assets, and 4) enhance bproductivity gains and cost cutting, i.e. close high-cost facilities.

A Moody’s downgrade to junk in late May should have minimal impact as less than $1B debt matures over the next four years and a revolver matures in 2017E. Maintain Neutral and $9 price objective; multiple at risk? Our $9 PO blends 7-7.5x 2013-15E EV/EBITDA vs 7.5x EV/EBITDA since ’99. A lower multiple could be deserved if Alcoa Inc (NYSE:AA) is removed from the Dow or if its credit gets cut to junk from a current split rating. We host an aluminum call on July 2.

Jorge Beristain, CFA of Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) on Alcoa

We expect Alcoa to report adjusted diluted EPS of 5c in 2Q13, below the FactSet consensus of 7c (down 4c over past 4 weeks). Our EPS estimate is 6c lower than 1Q13, largely due to softer aluminum price realizations on weaker LME benchmark (down 9% to 84c/lb at 15 day lag QoQ through June 14) and lower premia (~16c/lb, -0.5c/lb QoQ). EPS should also be negatively impacted by the Myara crusher move ($20m ATOI impact) and plant outages at Angelsea and Warrick ($25m combined ATOI impact), partially offset by production increases in both of the upstream businesses (+150k tons alumina and +15k tons aluminum). Excluding impact of bi-annual maintenance and commodity price fluctuations, core earnings could have been broadly stable QoQ.

1Q13 EBITDA estimated at $559m (-19% QoQ). We look for alumina sales of 2.4m tons (-20k tons QoQ) at $324/ton (-4% QoQ, with 50/50 split between 30 day lagged LME and spot). Combined

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