After the close last Monday, Alcoa (AA) reported numbers for the first quarter of 2011. For the first quarter of 2011, revenues rose by 22% to $6 billion dollars from a year ago on the back of increasing demand from end users and higher prices.
Earnings per share came in at $0.27 per share up from $0.24 earned in the fourth quarter of 2010.
Margins were strong across the board with cost of goods sold as a percentage of sales falling by 300 basis points on a year-over-year basis and 120 basis points sequentially.
Selling and general administrative expenses as a percentage of sales showed improvement decreasing by 80 basis points from a year ago and 90 basis points sequentially.
The stock sold off afterwards on fears that rising energy prices may crimp Alcoa’s profits in the near future as the production of aluminum is very energy intensive.
The Alumina division saw an increase in third-party pricing of 15%. Despite higher caustic, natural gas, and fuel oil prices after tax operating income was able to more than double to $142 million from $65 million in the fourth quarter of 2010.
For the second quarter, 20% of third party shipments in Alumina will be on spot or a prior month basis while the rest follow a 60 day LME lag. This will help pull higher revenues forward into the current quarter with respect to pricing.
In the Primary Metals division, 7% higher realized pricing helped drive after tax operating income to $202 million from $178 million in the fourth quarter of 2010 and $123 million a year ago.
Capacity restarts cost $9 million in the first quarter and will be profitable in the second quarter with no additional costs.
The Flat-Rolled Products division is showing strong growth with volume and price increases contributing to a sequential rise from $53 million to $81 million for ATOI during the first quarter of 2011.
The Engineered Products and Solutions Division showed a 15% sequential improvement in ATOI on a 2% jump in revenues despite weak building and construction markets.
In terms of end use markets, Alcoa is well positioned for the future. Growth in automobile, airplane, industrial gas turbines, trucking, and trailers are projected in the 5-10% range for 2011. These areas are seeing an increase in end use demand driven by a variety of factors.
Since first quarter earnings were released Alcoa announced two balance sheet initiatives. The first is a tender offer for the 5.375% Notes due on January 15, 2013 and the $400 million of the 6% Notes due on July 15, 2013.
The second initiative involves a shelf offering for $1.25 billion of 10 year 5.4% Notes to be used for funding the purchase of the Notes described above and corporate purposes which may include the repurchase of additional debt.
The note offering is positive as Alcoa’s debt profile is enhanced through the issuance of lower interest debt, taking advantage of attractive interest rates at longer profiles without significantly raising the company’s debt/equity ratio.
The selloff represents a buying opportunity for investors. Revenue growth year over year was more than 20%, the price of aluminum continues to remain strong, and user demand is strong.
At a Price/Sales ratio of 0.8 and a EV/Revenues ratio of 1.18 Alcoa represents good value after the post-earnings selloff. As the global recovery moves forward demand for Aluminum will increase. Alcoa is well positioned for the future showing strength across all divisions.
