Alcoa begins US earnings season
4/9/2013 10:09:27 AM

The company is considered a bellwether for the global economy, and given the timing of its earnings announcement as the unofficial beginning to earnings reporting, the release is closely watched by market participants.

The consensus estimate among Wall Street analysts polled by Bloomberg is that Alcoa will report earnings of $0.08 per share, down 19.7 percent from last year. Sales for the quarter are expected to amount to $5.88 billion, 2 percent less than the company made in the first quarter of 2012.

Investors have been mostly negative on Alcoa in recent months. Shares are down 9.5 percent since the company's last earnings announcement on Jan. 8.

"With base metal prices under pressure, investor focus will be on management’s actions (including possible meaningful reductions to cap-ex, asset sales, and or equity/preferred offering) to fend off a potential Moody’s downgrade," say Societe Generale credit strategists Ken Eigarten and Kevin McCarthy. "Our analyst Jaimin Patel sees a very limited set of options for AA to avoid an eventual one-notch downgrade to Ba1."

JPMorgan analyst Michael Gambardella was relatively optimistic on Alcoa before lowering his earnings estimate last week from $0.14 per share to $0.08, in line with the consensus estimate.

Gambardella cites the same big issue that the SocGen strategists flag: low aluminum prices.

"We are maintaining our estimates for the remainder of 2013 for now, but note that they are based on aluminum prices meaningfully higher than current levels," says Gambardella. "We note that aluminum prices currently sit at $0.84/lb, which are meaningfully below our metal strategist's price forecasts of $1.00/lb, $1.02/lb and $1.04/lb for 2Q13, 3Q13, and 4Q13, respectively. Our current 2Q13-4Q13E EPS estimates for AA assume these aluminum prices."

Goldman Sachs is slightly more bearish on Alcoa earnings than the consensus. Goldman analysts expect the company to report earnings of $0.07 per share.

"The main focus will be its free cash flow generation in the current depressed aluminum price environment. We estimate it will have negative free cash flow of more than $900mn this year," writes Goldman analyst Steve Song in a note to clients. "Based on our conversations with some investors, we believe that the market could be expecting some sort of equity dilution during the call; the most likely scenario in our view would be it paying $450 million of pension requirement with stocks, as it did in 2010 and 2011."