Alcoa, Inc. (AA) officially started the earnings season Tuesday after the bell when it reported 4th quarter EPS of 6 cents per share. This was in line with analyst estimates for the company to earn 6 cents per share for the quarter and $0.24 for the year, estimates that had changed little throughout the quarter. Analysts had been looking for revenue of $5.6 billion but the company reported revenue of $5.9 billion down $91 million year-over-year.
Alcoa believes 2013 will be a better year for aluminum pricing and demand. The company believes improving growth from China will drive a 7% increase in global aluminum demand in 2013. In the end markets the company sees aerospace aluminum demand increasing 9% to 10% with the only question mark in aerospace being US defense spending. US automotive production will be near all-time highs and the fundamentals of the market remain positive. In 2010 Alcoa estimated that global aluminum demand would double by 2020, and the run rate over the last two years is ahead of that pace.
The company remains focused on being cash flow positive and maintaining its investment grade credit rating. At the end of the quarter net debt was down to $7 billion, down 30% since 2008. Moody's believes the company will be troubled by low aluminum prices for several quarters. However Alcoa has only $400 million of debt maturities over the next 4 years. The company believes they are doing everything they can to maintain its credit rating. I believe the company needs aluminum prices closer to $1 per pound to maintain its credit rating.
When you look at the valuation of Alcoa it appears to be far from a value play at this point. For example its EV/EBITDA ratio and forward P/E are both higher than Kaiser Aluminum Corporation (KALU) ratios. Alcoa's 1.3% dividend yield is also not attractive to investors. When looking at EV/Revenue Alcoa is a somewhat better value than Aluminum Corporation of China Limited (ACH) and Kaiser, but that does not mean Alcoa is turning that revenue into positive cash flow.
When you look at the chart of Alcoa I believe it appears to be in a consolidation pattern. It appears that $8 per share is a strong area of support for the stock and I would not consider buying in until the price is closer to this level. The 10 cent move up after the earnings report is not enough to take the stock above the descending resistance, and I do not believe this report will provide the momentum to break out now. Furthermore concern over the debt ceiling and spending cut negations in the US should put a damper on highly economically sensitive stocks like Alcoa.
Data sourced from: Company filings, and Yahoo!Finance. Chart from: Freestockcharts.com