By David Berman
Alcoa Inc. (AA) beat analysts’ expectations when it reported its fourth quarter earnings on Monday. Now, H. Fraser Phillips, an analyst at RBC Dominion Securities, is downgrading the stock.
Mr. Phillips cut his recommendation to “underperform” from “sector perform,” although he raised his price target to $16 (U.S.) from $15. The reason for the cut? He believes that it is time to harvest gains following a sharp rise in the share price, which has climbed more than 60 per cent since the end of August – about triple the pace of the S&P 500.
“The prospects for the shares depend on the outlook for the aluminium market,” Mr. Phillips said in a note released on Tuesday. “Our analysis suggests that the aluminium market will continue to suffer from significant excess inventory and capacity and we expect aluminium prices to be constrained as a result, limiting any upside potential for the share price over the next 12–24 months.”
In its quarterly release, Alcoa reported earnings of 21 cents a share, after adjusting for one-time items. The results beat the consensus estimate of 19 cents a share among analysts and looked like a great way to kick off the start of the fourth quarter earnings season.
But there haven’t been any celebrations since then. Indeed, Alcoa shares have fallen two consecutive days – retreating by about 2 per cent – since Monday’s close. Part of the concern is that the earnings beat was due in part to a lower-than-expected tax rate.
Mr. Phillips acknowledged that Alcoa expects demand for aluminum to grow 12 per cent globally in 2011, even though it also expects a 245,000-tonne surplus in the metal. He also pointed out that Alcoa capital expenditures are expected to rise to $1.9-billion from about $1.2-billion last year.
“Following the recent strong rally in the share price, we believe the shares are fully valued relative to the underlying commodity price and we have lowered our rating,” he said. “We prefer investments in uranium, coking coal, thermal coal, copper and iron ore over aluminium.”