Modest Estimate Beat, Guidance Cut Expected From Alcoa's Q3

Morgan Stanley’s Evan L. Kurtz believe that if Alcoa Inc AA delivers in line downstream performance for Q3, the company would need to deliver very strong performance in Q4 to meet the 2017 guidance. However, customer commentary indicates this is unlikely.

Kurtz maintained an Overweight rating on the company, with a $12 price target.

Alumina Price

“Based on a 90-day lag alumina price, AA's 3Q aluminum costs should have sequentially increased by $55-60/t. However, at the time of 2Q results, the company guided to an increase of only $35-40/t,” the analyst mentioned.

Since Alcoa knew the actual quarter on quarter change in pricing before it issued the Q3 guidance, Kurtz believes that the guidance reflects “the timing of purchased alumina volumes in a volatile market.”

Q4 Guidance

The analyst believes that the ATOI guidance for Q3 for the TCS and EPS segments is achievable, with both segments expected to grow 5-10 percent year on year.

Management guided to revenue of $5.9-$6.1 billion for the EPS segment for 2016, with EBITDA margin of 21-22 percent, while guiding to revenue of $2.1 billion for the TCS segment, with EBITDA margin of 15 percent.

Kurtz believes that “between possibly lower wide body production, a still lackluster bizjet backdrop, and company specific dynamics, Aerospace estimates have more downside than upside risk.”