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According to tradition, aluminum company Alcoa (AA) kicked off the second quarter earnings season. The company reported its second quarter results on Monday after the close. Shares hardly reacted on the results, trading flat in after hours trading.

Second Quarter Results

Alcoa reported a second quarter loss of $2 million from its continuing operations, or $0.00 per share. Excluding special items, continuing earnings came in at $61 million, or $0.06 per share. The results are disappointing compared to Alcoa's first quarter profit of $94 million and 2011's second quarter profit of $322 million. The company took about $63 million in one-off charges during the quarter related to environmental remediation charges, uninsured fire damage and other settlements.

Second quarter revenues came in at $6.0 billion which is down 9% on the year driven by 17-18% price declines in metal and alumina prices. Revenues were up compared to the first quarter of 2012 driven by growth in the packaging, aerospace and commercial transportation industries.

CEO Kleinfeld commented on the second quarter results: "Alcoa maintained revenue strength and solid liquidity by driving high profitability in our mid and downstream businesses and by reducing costs and improving performance in our upstream businesses".

Outlook

Alcoa continues to project a global aluminum supply deficit for the full year and expects global aluminum demand to grow by 7% in 2012. Again Kleinfeld: "Although aluminum prices are down, the fundamentals of the aluminum market remain sound with strong demand and tight supply, and Alcoa is successfully capitalizing on accelerating demand in high-growth end markets such as aerospace and automotive".

Valuation

Alcoa reported revenues of $12.0 billion for the first half year of 2012, down 5% on the year. Net income from continuing operations fell to $92 million, or $0.08 per share compared to $0.55 per share in the second quarter of 2011. The company ended the second quarter with $1.7 billion in cash and equivalents. It did have over $13 billion in short and long term debts outstanding, including sizable pension obligations.

The market values the firm around 0.4 times annual revenues and 25 times annual earnings. This compares to competitor Norsk Hydro (NHDYA) trading at 0.6 times annual revenues and 25 times annual earnings.

The company pays a quarterly dividend of $0.03, for an annual dividend yield of 1.4%

Investment Thesis

Alcoa is playing good weather again in today's earnings report. While it did not earn any money during the quarter it is optimistic about the prospects of its businesses amidst global aluminum demand across the industry. Yet I remain very pessimistic about the long term prospects of the firm despite efforts to make the business more efficient by improving the company's operational cash flows and create competitive advantages in the mid-market.

Over the last decade shares have lost roughly 75% in value amidst dismal profitability and high leverage. The company has a net debt position of roughly $12 billion, a sizable amount given the lack of profitability of the business. It's aging and retiring workforce is furthermore driving up pension expenses. In the first half of 2012 alone, the company spend $352 million in pension expenses. Furthermore, reorganization costs and other "one-time" charges will continue to beat the bottom line in the coming years as the business tries to modernize.

So far shares have return about a percent in 2012, but I see no triggers for long term outperformance.

Source: Alcoa - Cautious Kick Off Of The Earnings Season