Alcoa Inc. (AA), the largest U.S. aluminum producer, is set to record the strongest annual earnings growth in three years as the price of the commodity rebounds and after the company closed its most inefficient smelters.
Alcoa will today report fourth-quarter profit after one- time items of 6 cents a share, according to the average of 19 analysts’ estimates compiled by Bloomberg, compared with a year- earlier loss of 3 cents. Earnings in 2013 will more than double to 65 cents a share while the aluminum price will rise 6.4 percent, the estimates show.
“They’re moving in the right direction,” said Paul Massoud, a Washington-based analyst at Stifel Nicolaus & Co. Inc. who recommends buying the shares. “When you look at the operational side of things, they’ve done very well.”
Chief Executive Officer Klaus Kleinfeld closed 12 percent of Alcoa’s aluminum production capacity and sold a hydropower plant in Tennessee in 2012. Those cost-cutting efforts combined with higher commodity prices may help the company avoid a downgrade to junk by Moody’s Investors Services Inc., which said Dec. 18 it was reviewing its rating on Alcoa’s $8.3 billion of debt.
Typically the first company in the Dow Jones Industrial Average to report earnings, New York-based Alcoa is scheduled to announce results after the close of trading. The shares, which were unchanged at $9.10 as of 9:55 a.m. in New York, have declined 0.6 percent in the past 12 months while the index rose 7.9 percent.
Libby Archell, a spokeswoman for Alcoa, declined to comment on the results ahead of the announcement.
Alcoa completed the shutdown of its Portovesme smelter in Italy in the fourth quarter while its $10.8 billion joint venture in Saudi Arabia produced its first metal. The Saudi plant combines all the stages of aluminum production, from bauxite mining through to sheet rolling, and will be Alcoa’s lowest-cost factory, according to the company.
The closing and startup marks “the end of one era and the beginning of a new one,” said Lloyd O’Carroll, an analyst at Richmond, Virginia-based Davenport & Co. who recommends buying the shares.
Portovesme was among the 531,000 tons of smelting capacity Alcoa closed last year. The company achieved $838 million in productivity gains in the first nine months of 2012, compared with a full-year target of $800 million, Chief Financial Officer Chuck McLane said Nov. 7.
Alcoa announced in 2010 a $4.1 billion target for growing revenue from its global rolled products and engineered solutions segments by 2013. It also plans to increase margins on earnings before interest, taxes, depreciation and amortization at those units, whose customers include Boeing Co. and Bombardier Inc. (BBD/B) In July, Alcoa broke ground on a $90 million plant in Lafayette, Indiana, to make aluminum alloys used in aircraft.
“They’ve been going through a process where they’ve been expanding revenue from both mid- and downstream,” Stifel’s Massoud said, referring to Alcoa’s divisions that make rolled aluminum and engineered products. “They should get to their goals by the end of this year.”
Bets that Alcoa shares will fall have dropped to a nine- month low. The short interest slid to 3.5 percent of shares outstanding on Jan. 3, near the least since April and down from a high of 9.1 percent in August, according to data compiled by Bloomberg and Markit, a London-based research firm.
Aluminum for immediate delivery on the London Metal Exchange averaged $2,021 in 2012. The metal will average $2,150 this year according to the median of 20 analysts’ estimates. The price is seen rising to $2,292 in 2014 and $2,400 in 2015, the estimates show, which would help Alcoa’s bottom line.
“If they ever get the wind at their back from rising LME prices, the Street could have a very nice upside surprise on their hands,” Davenport’s O’Carroll said. “The question is when and to what degree.”
Aluminum is still some way off its previous highs. The LME price for delivery in three months -- the most commonly traded contract on the bourse -- peaked at $3,317 a ton in 2008, the highest in at least 21 years, before plunging during the financial crisis.
Global demand will rise 6.3 percent this year, according to Barclays Plc. Aluminum production kept climbing last year, led by a 9 percent gain in China, according to 2011 data from the U.S. Geological Survey, the most recent year available.
“Aluminum is probably one of the strongest in terms of demand growth; the problem is the production growth,” said David Lipschitz, an analyst at Credit Agricole Securities USA Inc. in New York who recommends selling the shares. “In 2013, you’re probably talking another 9 or 10 percent growth, which offsets the demand growth.”
Global inventories of aluminum held in warehouses monitored by the LME reached a record 5.2 million metric tons in December. Global stockpiles will expand to a record of 8.67 million tons in 2013 as production exceeds demand by 1.66 million tons, Barclays analysts led by London-based Gayle Berry wrote in a report Dec. 14.
That supply-demand picture continues to hang over the aluminum market and Alcoa. Moody’s placed Alcoa’s Baa3 senior unsecured rating, the lowest investment-grade level, under review for downgrade last month, citing the “challenging headwinds” faced by the company.
The recovery in the aluminum industry is “slow and uneven” and the price of the metal will stay at 85 to 95 cents a pound, or $1,874 to $2,094 at ton, for the next several quarters, Moody’s said.
Still, the LME three-month price averaged 3.5 percent higher in the fourth quarter compared with July through September.
“In the last three months we’ve had a nice recovery in the aluminum price,” said Jorge Beristain, an analyst at Deutsche Bank AG in Greenwich, Connecticut, who recommends holding Alcoa shares. The improvement should boost Alcoa’s Ebitda, he said.
“The price change should generate $80 to $90 million of positive sequential momentum,” Beristain said.
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