Earnings Analysis: Alcoa, Inc.

| About: Alcoa, Inc. (AA)

Alcoa, Inc. (NYSE:AA) reports preliminary financial results for the quarter ended 2012-09-30.

Alcoa, Inc. recently reported its preliminary financial results, based on which CapitalCube provides a unique peer-based analysis of the company.

Alcoa, Inc.'s analysis versus peers uses the following peer-set: Norsk Hydro ASA (OTCQX:NHYDY), Hindalco Industries Ltd. (500440-IN), National Aluminum Co. Ltd. (532234-IN), Alumina Ltd. ADS (AWC), Aluminum Corp. of China Ltd. ADS (NYSE:ACH) and Kaiser Aluminum Corp. (NASDAQ:KALU). The table below shows the preliminary results, along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2012-09-30 2012-06-30 2012-03-31 2011-12-31 2011-09-30
Revenues 5,833.0 5,971.0 6,015.0 5,992.0 6,455.0
Revenue Growth % (2.3) (0.7) 0.4 (7.2) (2.6)
Net Income (143.0) (2.0) 94.0 (192.0) 171.0
Net Income Growth % N/A (102.1) N/A (212.3) (47.4)
Net Margin % (2.5) (0.0) 1.6 (3.2) 2.6
ROE % (Annualized) (4.2) (0.1) 2.7 (5.4) 4.5
ROA % (Annualized) (1.4) (0.0) 0.9 (1.9) 1.7

Valuation Drivers

Alcoa, Inc.'s current Price/Book of 0.7 is about median in its peer group. The market expects Alcoa, Inc. to grow faster than the median of its chosen peers (PE of 127.5 compared to peer median of 19.3), and to improve its current ROE of -1.7%, which is below its peer median of 1.5%. Thus, the market seems to expect a turnaround in Alcoa, Inc.'s current performance.

The company's profit margins are below peer median (currently -1.0% vs. peer median of 1.6%), while its asset efficiency is about median (asset turns of 0.6x compared to peer median of 0.7x). Alcoa, Inc.'s net margin is less than (but within one standard deviation of) its five-year average net margin of 1.5%.

Economic Moat

Changes in the company's revenues are in-line with its peers (annual revenue changed by 18.6%), but its earnings performance has been better -- its annual earnings changed by 134.0% compared to the peer median of 78.0%, implying that it has better cost control relative to its peers. Alcoa, Inc. currently converts every 1% of change in revenue into 7.2% of change in annual reported earnings.

Alcoa, Inc.'s return on assets is less than its peer median currently (-0.6% vs. peer median 1.3%). It has also had less than peer median returns on assets over the past five years (1.4% vs. peer median 2.9%). This performance suggests that the company has persistent operating challenges relative to peers.

The company's gross margin of 12.8% is around peer median, suggesting that Alcoa, Inc.'s operations do not benefit from any differentiating pricing advantage. In addition, Alcoa, Inc.'s pre-tax margin is less than the peer median (-1.3% compared to 2.8%), suggesting relatively high operating costs.

Growth And Investment Strategy

While Alcoa, Inc.'s revenues have increased more slowly than the peer median (-2.4% vs. 4.1%, respectively for the past three years), the market currently gives the company a higher than peer median PE ratio of 127.5. The stock price may be factoring in some sort of a strategic play.

Alcoa, Inc.'s annualized rate of change in capital of 1.3% over the past three years is less than its peer median of 7.7%. This below median investment level has also generated a less than peer median return on capital of -0.2% averaged over the same three years. This outcome suggests that the company has invested capital relatively poorly and now may be in maintenance mode.

Earnings Quality

Alcoa, Inc. reported relatively weak net income margins for the last 12 months (-1.0% vs. peer median of 1.6%). This weak margin performance and relatively conservative accrual policy (8.2% vs. peer median of 2.4%) suggest the company might likely be understating its net income, possibly to the extent that there might even be some sandbagging of the reported net income numbers.

Alcoa, Inc.'s accruals over the last 12 months are positive, suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median -- which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts

Company Profile
Alcoa, Inc. is engaged in the production and management of primary aluminum, fabricated aluminum, and alumina. Its products are used worldwide in aircraft, automobiles, commercial transportation, packaging, oil and gas, defense, and industrial applications. The company operates through four reportable business segments: Alumina, Primary Metals, Flat-Rolled Products and Engineered Products and Solutions. The company was founded on October 1, 1888 by Charles Martin Hall and is headquartered in New York, NY.

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