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Alcoa Inc (AA) Q4 Earnings Preview

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Alcoa Inc (NYSE:AA), one of the world’s largest aluminum producers, has had its expected 4th quarter EPS and 2014 price targets reduced on falling aluminum prices.

“Our metal strategists recently published a report lowering their metal price forecasts for aluminum, copper, zinc and gold,” writes J.P. Morgan analyst Michael F. Gambardella. The bank’s 2014 forecast for aluminum is down from $0.89/lb to $0.84/lb, causing Gambardella to lower his 2014E EPS from $0.65 to $0.44 and the December 2014 price target from $10 to $9, reflecting an EV/EBITDA multiple of 7.6x.

Gambardella has been impressed with Alcoa management’s efforts to cut costs and pursue downstream growth, making the stock a possible long-term prospect, but says that “in the nearer term, 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.”

Analysts rate Alcoa stocks as neutral

UBS analyst Brian MacArthur agrees that the company is facing headwinds in the near-term, though he is slightly more optimistic in long-term, setting the 12-month price target at $10 (both analysts rate the company at Neutral). He expects a 4th quarter EPS of just $0.05, compared to a consensus of $0.06 and Gambardella’s EPS target of $0.07.

“Operational improvements in the downstream segments have resulted in better than expected results over the last several quarters, upstream results continue to be pressured by weak aluminum prices,” writes MacArthur. While Alcoa Inc (NYSE:AA) has the stated goal of dropping from the 47th percentile to the 38th percentile on the aluminum cost curve by 2016, MacArthur argues that “ongoing capex requirements, pension contributions and restructuring payments will limit AA’s cash flow generating ability.”

Aluminum prices are the main source of risk

Obviously, the main upside or downside risk to Alcoa Inc (NYSE:AA)’s stock price is the aluminum spot price – if aluminum prices go up then Alcoa can bring in more revenue – and this possibly could be caused by a faster than expected global recovery, leading to higher demand for construction materials of all kinds. Cost-cutting measures are expected to help with margins, but it’s unlikely for Alcoa Inc (NYSE:AA) to have a big positive surprise in this regard. Because its business model is so tightly tied to the larger economy and commodity prices, analysts have had more success setting price targets for Alcoa compared to less predictable sectors.


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