We maintain our Neutral recommendation on Alcoa Inc. (AA). Alcoa reported first-quarter 2011 earnings per share of $0.28, which was a penny ahead of the Zacks Consensus Estimate. However, revenues of $5.96 billion missed the Zacks Consensus Estimate of $6.112 billion. The company posted improved profits across all its business segments and set profit records in its midstream and downstream businesses. The company expects aluminum to remain in great demand for the rest of 2011 due to the metal’s unique properties of being light, strong and reusable. Therefore, Alcoa has a positive outlook for the rest of 2011 and expects global aluminum demand to grow 12% in 2011.
Alcoa plans to restart idled potlines at three aluminum smelters in the United States, creating approximately 260 new jobs through recall and hiring. The restarted facilities will increase Alcoa’s aluminum production by 137,000 metric tons over the course of 2011 and by 200,000 metric tons on an annual basis thereafter. The restarts allow Alcoa to take advantage of long-term, low-cost power options that will continue to move the company down on the aluminum cost curve and improve its overall competitiveness.
We believe that Alcoa’s cost reduction efforts are, to some extent, offsetting the negative impact on profitability from higher energy and raw material costs. The company is divesting underperforming assets through its restructuring program. To boost savings, Alcoa proposed to cut 24,600 jobs, of which over 21,500 have been completed. These reductions contributed $325 million in cash savings in 2009 and will achieve run rate savings of $600 million by 2011. Alcoa's headcount was down to 59,000 in 2010.
Alcoa is expected to benefit from the improving outlook of aluminum and alumina prices. China and India are undergoing rapid industrialization. Both these factors are positives for underlying aluminum demand. We expect aluminum demand to increase over the next three years, outstripping supply growth. Therefore, the aluminum market is likely to see deficits for a prolonged period. This provides a backdrop supportive of high alumina and aluminum prices.
We are also optimistic about Alcoa’s long-term growth projects in China, Australia, Jamaica, Suriname and Brazil. Demand from these countries is expected to increase its alumina and aluminum production capacity while lowering its operating costs. The company recently expanded its Alumar Refinery, north of Brazil, and doubled its annual alumina capacity from 1.5 million tons to 3.6 million tons. Recently, Alcoa started production at its Aviles smelter in Spain under the Primary Metal segment. We expect such expansions to drive Alcoa’s top line.
On March 9, 2011, Alcoa completed an acquisition of the aerospace fastener business of TransDigm Group Inc. for $240 million. The assets and liabilities of this business were included in the Engineered Products and Solutions segment as of March 31, 2011. Moreover, this business’ results of operations were included in this segment beginning on March 9, 2011. This acquisition is part of a strategic plan to accelerate the growth of Alcoa’s fastener business, while adding efficiencies, broadening the existing technology base, and expanding product offerings to better serve customers and increase shareholder value.
Alcoa faces stiff competition from Aluminum Corporation Of China Limited (ACH), Rio Tinto Plc. (RIO) and BHP Billiton Ltd. (BHP).
Currently, Alcoa has a short-term (1 to 3 months) Zacks #3 Rank (Hold rating) and a long-term (6 months) Neutral recommendation.
ALCOA INC (AA): Free Stock Analysis Report
ALUMINUM CP-ADR (ACH): Free Stock Analysis Report
BHP BILLITN LTD (BHP): Free Stock Analysis Report
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