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By: Brendan Gilmartin

Overview

Alcoa (AA) is scheduled to report 2Q 2012 earnings after the closing bell on Monday, July 9. A conference call will follow at 5:00 p.m. EST. Alcoa is a critical release, as the company is the first of the Dow 30 members to report quarterly results and is often viewed as a proxy for the ensuing earnings season. The results therefore have an impact across the broader market, including the index futures and ETFs.

Outliers & Strategy

  • Sympathy Plays: Kaiser Aluminum (NASDAQ:KALU), Century Aluminum (NASDAQ:CENX), Alumina (AWC), and Aluminum Corp of China (NYSE:ACH).
  • Alcoa is seen posting EPS of $0.06 for the 2Q period (well below the $0.12 projected 90 days earlier) (Source: Yahoo! Finance). The range of estimates is from breakeven to $0.12.
  • On the London Metal Exchange (LME), aluminum prices have sunk to 2-year lows on waning global demand.
  • Despite lower aluminum prices, U.S. auto producers (Ford & GM), delivered stronger than expected June sales reports, implying demand for the metal may have picked up toward the quarter-end.

Recent News

  • 06/26: Deutsche Bank cut its 2Q 2012 EPS estimate on Alcoa from $0.16 to $0.04, citing falling aluminum prices, coupled with repair and maintenance costs, according to a report on MarketWatch.com. Macroeconomic weakness was another factor.
  • 06/25: Stifel Nicolaus cut its 2Q 2012 EPS estimate on Alcoa from $0.11 to $0.03 due to falling aluminum prices, according to a post on Barron's. The firm noted that LME aluminum prices dropped about 12.5% during the 2Q and projected further weakening.
  • 06/21, According to StreetInsider.com, Goldman Sachs cut its 2Q 2012 earnings estimate on Alcoa from $0.17 to $0.07 on forecasts for lower aluminum prices. The firm expects weak supply/demand fundamentals through 2014. The price target was cut to $10.

Technical Review

Alcoa shares are off about 11% since the start of the 2Q period, nearly matching the pullback in LME Aluminum contracts over that same timeframe. The shares recently succumbed to a low of $8.21 (6/4) its weakest level since April 2009. Despite the waning sentiment and concurrent pullback in aluminum futures, the shares have been rebounding over the past several sessions, climbing toward resistance at $9 - a previous support level going back to mid-2009. Should Alcoa penetrate that key level, there is room to run toward the 200-Day SMA near $9.60, followed by the $10 per share area. Conversely, initial support is at the 20-Day SMA near $8.60, with further downside risk to the aforementioned low of $8.21. (Chart courtesy of StockCharts.com)

Summary

Alcoa shares recently tumbled to a multi-year low, mirroring the pullback in aluminum prices, due to slower worldwide demand stemming from softness in manufacturing activity in the U.S. and China, and the economic woes plaguing Europe. Against this negative backdrop, nearly every sell-side analyst has EPS estimates (Abnormal EPS per the Selerity methodology) in half from about $0.12 three months ago to a more recent $0.06. Technically, Alcoa shares have formed a pretty solid support base in the $8.40/$8.60 area, with potential upside toward $10.00 if earnings surprise to the upside. In either case, the results will be watched closely for clues on the health of the economy and as a gauge on the broader market entering the 2Q 2012 earnings period.

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Source: Alcoa Shares Coming Off Multi-Year Lows Ahead Of 2Q Earnings