Alcoa: Not Attractive Despite Earnings Beat

Apr.10.12 | About: Alcoa, Inc. (AA)

Shares of Alcoa (AA) trade 5% higher in after hours trading on the back of its first quarter results. Alcoa traditionally opens the earning season, a reason why analysts watch the results of the aluminum giant closely.

First Quarter Results

Alcoa reported a first quarter profit of $94 million compared to $309 million last year. Earnings per share came in at $0.09 vs. $0.29 last year which was far ahead of analysts expectations which on average expected a $0.03 loss. Revenue rose 1% on the year to $6.0 billion, ahead of consensus of $5.77 billion, despite the fact that aluminum prices were down 9% on the year.

Performance rebounded strongly this quarter due to our proactive cash sustainability actions, our relentless focus on profitable growth, and stabilizing markets," said Klaus Kleinfeld, Alcoa Chairman and Chief Executive Officer. The company continues to see global aluminum demand grow by 7% in 2012 in combination with a supply deficit.

Valuation

Alcoa ended its latest quarter with $1.7 billion in cash and equivalents and $9.3 billion in debt. Valued at $10 billion the market values the aluminum producer at roughly 0.5 times annual revenue and 40 times 2011's earnings. In 2011 the company managed to report a profit for the first time in two years amidst falling revenues. With better than anticipated results in the first quarter the company is off to a strong start in 2012. This year could mark the second year of revenue growth and a continued improved in profitability, given that the global economy remains on its current path.

Investment Thesis

Shares of Alcoa are notoriously volatile and fluctuate with the merits of the general economy. Despite the fact that shares have lost 75% over the last decade they are not an obvious value play as revenues and profit margins have eroded. The business is essentially a commodity business with little opportunities to differentiate in order to create sustainable higher margins. Furthermore the stock has been plagued by years in which high restructuring costs depressed the bottom line.

Despite the beat which will inevitably lead to a nice trading day tomorrow there is little long term sustainable upside in shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.