Alcoa Makes Cuts - But Analysts Say Not Enough

Analysts are pleased that Alcoa Inc. (AA) announced a series of severe cutbacks to conserve cash and weather the downturn in the global economy. However, they are worried that the company may not have cut enough.

Michael Gambardella, an analyst at J.P. Morgan, wrote that the Alcoa announcements, which include 13,500 job cuts and output and capital spending reductions, are "not nearly aggressive enough" to prevent excessive cash burn unless the aluminum price rallies back to $1.00 a pound. The spot price is currently hovering around $0.70.

If the company does start burning through its cash too quickly, he wrote that it may have to tap the capital markets or cut its dividend. He maintained a "neutral" rating on the stock and a target of $8.00 a share.

"Remain cautious," he wrote.

Analyst Fraser Phillips of RBC Capital Markets agreed that Alcoa's actions are "positive and necessary," but may not be enough. He expects that the company is earnings breakeven at aluminum prices of $0.80 a pound. If they remain under that level, then further spending and cost cuts may be needed. He also expects the aluminum market to remain in surplus in 2009, which could keep a lid on prices.

"We expect any share price upside to be limited until aluminum demand begins to rebound on the back of renewed economic growth," he wrote in a note. He maintained a "sector perform" rating on the stock and a target of $13.25 a share.

Tony Robson of BMO Capital Markets is now forecasting a loss of $1-billion for Alcoa in the fourth quarter. At the current aluminum spot price of $0.70 a pound, he wrote that forecast EBITDA of $1.3-billion for 2009 would fall to negative $370-million.

Comments

[apppro:]

It is just sooooooooo easy for anal_ysts and others to provide a negative outlook on companies, and the entire American society as a whole, right now. An entire cottage industry of pessimists has risen out of the ashes of the 'confidence crisis'.

Jan 08 07:14 AM

[MMN1:]

I'm looking into a job working for this company in about a year and doing some research into the aluminum market. It seems pretty volatile and unstable right now, and with the way the economy's doing right now, doesn't seem its going to improve much. Although my job recruiter would tend to disagree with any negative news I can find about Alcoa. It turns out they're getting about 440 million to revamp a power plant in Indiana and supply some of that power to the Grid, based on the needs of their factories. I guess i'll just have to wait and see what the aluminum market does, and whether Alcoa will continue to dispose of employees as the price of aluminum remains low.

Jan 14 06:31 PM