Alcoa Earnings Preview: Lower Fourth-Quarter Revenue Expected

Alcoa AA, shares of which have surged about eight percent in the past week, is scheduled to report its fourth-quarter 2012 results Tuesday, January 8, after the markets close. Investors will be looking to see how much the sluggish global economy, particularly in China and in Europe, will drag on earnings. Moody's recently warned that it might downgrade Alcoa, in part due to its debt load. Expectations Analysts on average predict that Alcoa will report revenue for the quarter that fell more than six percent year-over-year to $5.61 billion. Per-share earnings are expected to come to $0.06, compared to a net loss of $0.03 per share in the same quarter of last year. That consensus earnings estimate has slipped in the past 60 days from $0.08 per share. Alcoa has not fallen short of earnings expectations in the past four quarters. The third quarter adjusted profit of $0.03 surprised analysts, who had expected Alcoa to break even. Alcoa attributed the third quarter results to stronger demand for aluminum products from airplane and automobile producers. But it also posted charges for settlements with the Environmental Protection Agency and a joint venture partner in Bahrain, and it lowered its aluminum demand expectations for the fourth quarter, largely due to China's economic slowdown. The share price pulled back almost five percent in the week following the third-quarter report. The analysts' consensus full-year forecast calls $0.24 per share earnings on revenue of $23.36 billion. That compares to $0.72 per share and $24.95 billion in the previous year. That consensus EPS estimate has declined in the past 60 days from $0.26. The Company Alcoa is the world's third largest producer of aluminum. The company operates in four segments: Alumina, Primary Metals, Flat-Rolled Products, and Engineered Products and Solutions. This S&P 500 and Dow Jones Industrial Average component has a market capitalization near $9.9 billion and its operational headquarters are in Pittsburgh. Klaus Kleinfeld has been the chief executive since May 2008. Alcoa's two larger competitors are privately held Rio Tinto Alcan and RUSAL. It also competes with Aluminum Corporation of China ACH. The latter is expected to report net losses for the fourth quarter and the full year. During the three months that ended in December, Alcoa sent its first shipment of alumina to a new joint venture-run facility in Saudi Arabia, completed the sale of a hydroelectric project located in Tennessee and opened an aluminum wheel facility in China. Performance Alcoa's long-term EPS growth forecast is more than 10 percent, and the forward earnings multiple is less than the industry average price-to-earnings (P/E) ratio. The operating margin is greater than the industry average, but the return on equity is in negative territory. The number of shares sold short is more than six percent of the float, the highest it has been since the end of October. Only six of the 19 analysts surveyed by Thomson/First Call who follow the stock recommend buying shares; 10 of them recommend holding shares. However, the analysts believe the stock has some room to run as their mean price target represents almost 11 percent potential upside. But that target price is less than the 52-week high from early last year. Shares flirted with the 52-week low in mid-November, but they have risen about 15 percent since then. As previously mentioned, the share price jumped about eight percent in the past week. It crossed above the 200-day moving average for the first time since September. Over the past six months, the stock has underperformed Aluminum Corp. of China, but its performance has been in line with the DJIA. ACTION ITEMS Bullish: Investors interested in exchange traded funds invested in Alcoa might want to consider the following trades:

• iShares Dow Jones U.S. Basic Materials IYM is almost nine percent higher than a month ago.
• Materials Select Sector SPDR XLB is about eight percent higher than a month ago.
• Vanguard Materials ETF VAW is about seven percent higher than a month ago.

Bearish: Traders may prefer to consider these alternative positions in the same sector:

• Alpha Natural Resources ANR is up more than 29 percent in the past month.
• Cliffs Natural Resources CLF is up more than 28 percent in the past month.
• Companhia Siderurgica Nacional SID is up more than 20 percent in the past month.
• Vale VALE is up almost 18 percent in the past month.