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By: Brendan Gilmartin - VP, Research And Content

Alcoa (NYSE:AA) is scheduled to report Q1 2013 earnings after the closing bell on Monday, April 8. A conference call will follow at 5:00 p.m. EST. Alcoa is a critical release, as the company is the first member of the Dow 30 to report quarterly results and is often viewed as a proxy for the ensuing earnings season. The results may therefore have an impact across the broader market, including the index futures and ETFs.

Outliers And Strategy

Sympathy Plays: Kaiser Aluminum (NASDAQ:KALU), Century Aluminum (NASDAQ:CENX), Noranda Aluminum (NYSE:NOR), and Aluminum Corp of China (NYSE:ACH).

Alcoa is seen posting EPS of $0.10 for the Q1 period (below the $0.13 projected 90 days earlier) (Source: Yahoo Finance). The range of estimates is from $0.04 to $0.16. Revenues are seen falling 1.2% to $5.93 bln.

On the London Metal Exchange (LME), aluminum prices declined throughout the quarter, dropping close to 10%.

Alcoa shares tend to see minimal movement off earnings, while the index futures (S&P & Dow E-mini) fluctuate more heavily given the psychological impact from the Dow's first quarterly earnings release.

On February 22, Noranda Aluminum reported "stable" demand, despite low LME aluminum prices which were offset by reduced natural gas prices. Total segment profits were also sharply higher quarter/quarter.

Recent News

04/02: The leading automakers reported stellar results for the month of March, a sign that demand for raw materials such as aluminum remains strong:

  • GM reported March sales were the highest in 5 years, citing a strengthening economy and new products.
  • Ford delivered its best monthly results since May, 2007.
  • Toyota said sales were the strongest since August 2009, thanks to improving economic conditions.

03/31: The National Bureau of Statistics in China reported the manufacturing purchasing managers index (PMI) improved by 0.8% month over month to 50.9%, with automobile manufacturing remaining comfortably above the 50% threshold.

Technical Review

Alcoa shares have come under heavy selling pressure ahead of the Q1 2013 earnings release, with the Relative Strength Index dipping toward the 30-level - an area that generally signals an oversold scenario. Should earnings disappoint, downside appears pretty limited, with the November low near $8.00 offering near-term support. Should earnings either meet tempered forecasts or surprise to the upside, look for initial resistance at $8.50, just below the 200-Day SMA, followed by $8.90. (Chart courtesy of StockCharts.com)

Summary

Alcoa shares have been tracking the decline in London aluminum prices, slipping to the lowest level since late November. Despite the weak prices, demand appears stable, evidenced by the recent flurry of positive sales reports from the top U.S. automakers, while signs point toward an uptick in the global economy, particularly in China. Furthermore, Alcoa is trading at a relatively steep discount to Book Value ($12.36), while the company continues to slash debt, shore up its balance sheet to maintain its favorable credit profile, and forecast global aluminum demand growth of 7%, up from 6% in 2012. Barring a loss for the quarter, much of the weakness on pricing looks factored into the shares at these levels.

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Source: Alcoa Appears Oversold Ahead Of Q1 2013 Earnings