Alcoa: Earnings Insight

Jul. 9.12 | About: Alcoa, Inc. (AA)

Alcoa, Inc. (NYSE:AA) reports Monday after the market closes. I was just looking at aluminum pricing and things aren't looking good. Sure, Alcoa has already taken a substantial cut to earnings and revenue estimates. Presently, Alcoa is expected to report $5.81 billion in revenues, and $0.06 EPS. The table below illustrates how the earnings estimates for this quarter have moved recently :

So Alcoa already had quite a bite taken out of estimates, with estimates being cut in half in just the last 90 days. Also, Alcoa reported $0.10 in EPS and $6 billion in revenues for the first quarter of the year.

However, there is a slight problem, which will either hit the quarter being reported, or the guidance for next quarter. The problem is illustrated below - Alcoa's earnings follow the aluminum price quite closely (the Aluminum price I used is from the LME).

Click to enlargeAluminum LME Price ChartClick to enlarge

Aluminum LME Price data by YCharts

And guess what, aluminum is trading at a level consistent with Alcoa showing losses. If not this quarter, then for next quarter, where earnings estimates are still a full $0.12 (and revenues are expected at $6.05 billion).

Indeed, by calculating an average aluminum price with the monthly closes for Q1 and Q2, we reach the conclusion that aluminum fell 9% on average between Q1 and Q2, and what's worse, it's now trading at the very low point of the entire range and trending lower. This makes the earnings estimate consensus for next quarter quite unlikely.

On the bright side

The largest cost for a company making aluminum is energy, and natural gas (The United States Natural Gas ETF, LP: UNG) is usually the marginal fuel setting power prices, which means that the low natural gas seen during the first half of 2012 helped Alcoa's margins. This effect might still have helped the quarter being reported, since natural gas bottomed during April.

Still, natural gas has been heading up and is expected to continue up during 2013, whereas for aluminum the outlook isn't so bright.


Given the aluminum price trend, it seems likely that either Alcoa prints below expectations or guides the next quarter down.

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