As usual, the world's largest aluminum producer Alcoa (NYSE:AA) will kick start the earnings month on October 9. Given the stock's lackluster performance, the analysts and investors are not expecting the results to rekindle any fresh interest on the stock. There are several reasons to back their opinion.
First and foremost, Asia is the largest consumer of aluminum with over 60 percent of the global aluminum consumption based on a data from European Aluminum Association. Of this, China alone accounts for more than 40 percent of the global aluminum consumption. The economy has slowed down in China and India. Japan offered some hope in the initial period of the year, but the global uncertainty is hurting its economy too. Therefore, aluminum demand from the Asian region will continue to be sluggish.
European Union, excluding Russia, is the next biggest aluminum consumer with over 16 percent of worldwide production. It is a well known fact that if the global economy is in tantrums currently, part of the reason is the financial crisis that the region is facing. This leaves little scope for the other regions to offset the sluggishness in Asia and Europe.
North America is the third largest aluminum consumer with nearly 13 percent of global production of aluminum. The transport sector driven by the automobile and the aerospace in the Americas could offer some solace. However, this will not be enough for Alcoa to cover up the shortfall from other regions.
Just before the fourth and first quarterly results, the company announced its intention to cut production so as to allow better price realization. However, this has not yielded any results so far. This could be seen from the price being quoted in the London Metal Exchange or LME. In July, the price of aluminum in the cash market stayed slightly above $1800 per metric ton, but it threatened to break below $1800 per metric ton level in August. Before this, aluminum traded modestly above $1900 in the initial period and middle of July. Only in September, the aluminum price broke the psychological barrier of $2000 level and traded above $2100 but below $2200 level. However, this could not be sustained and aluminum started trading below $2100 level during the close of September.
As a result of the pricing pressure, the company's EBITDA for the first two quarters were 10.4 percent and 8.7 percent respectively thus indicating the market scenario. Alcoa will struggle to maintain its EBITDA around 8.7 percent levels in the third quarter based on the price movement in LME. While the price quoted in the LME is not a price realization for Alcoa, it indicates the trend in aluminum prices globally.
Meanwhile, for the third quarter, street analysts' have already reduced their EPS estimate to just one cent a share from 11 cents a share predicted 90 days back. Even a week ago, Street analysts' were expecting 3 cents a share. Wall Street analysts' are also expecting 12.7 percent year-over-year fall in revenue to $5.60 billion. This is lower than $5.96 billion generated in the second quarter.
Significantly, Alcoa's earnings topped analysts' expectations in the last two quarters due to product mix and control over costs. While the company could continue to gain from the product mix and cost control, the overall sluggishness in the industry could prevent investors to clamor for this stock. This could be seen from the stock movement. The shares of Alcoa could gain only 1 percent until October 2 after the company announced its second quarter earnings results. On the other hand, S&P 500 advanced 6.9 percent during the same period. The stock is not likely to offer any significant appreciation for the short term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.