Morgan Stanley Gives Color On Alcoa Following Recent Earnings Report

Alcoa AA reported 1Q11 EPS of $0.27, or $0.28 adjusted for special items; this was slightly ahead of Morgan Stanley's $0.26 estimate and in line with consensus at $0.27. While the absence of a stronger beat may lead to profit taking following a strong run in the shares recently, Morgan Stanley continues to see value in shares. Better-than-expected 1Q performance in the alumina and flat-rolled segments supports our longer-term thesis. Further, it believes risk to consensus estimates remains on the upside, based on the expectation of continued firm aluminum and alumina prices and rising downstream operating rates. Realized price on third-party shipments rose 140bp QoQ, to 15.5% of the 2-month lag aluminum price; this was ahead of the historical trend. Historically, when aluminum rises, AA's realized linkage rate declines. Morgan Stanley suspects AA is running ahead of schedule on switching to spot pricing and achieving stronger pricing. Morgan Stanley has a $22 PT and Overweight rating on AA AA closed Monday at $17.77