All Eyes on Alcoa

The aluminum producer was the first blue-chip company to report second-quarter results, and its record numbers fell short of expectations

Alcoa (AA) proved that it is, indeed, a good time to be a commodities producer, but not quite as good as investors had figured. On July 10, the world's biggest aluminum company reported the highest quarterly sales and profits in its 115-year history. Net income for the second quarter surged 62%, to $744 million, from a year earlier, as sales rose 19% to $7.96 billion. The record profit came despite a $35 million charge for strike preparations and a new U.S. labor contract.

Still, there were some disappointments. The revenue figure fell short of the $8.01 figure that industry analysts had been expecting. Moreover, company executives warned that aluminum prices likely will fall in the third quarter. As a result, Alcoa's stock price, down 14 cents during regular trading, to $33.41, fell as much as $1.37 in after-hours trading.

The report may affect equity markets on July 11. Alcoa is the first blue-chip company to report second-quarter results. It also is seen as a proxy for the industrial economy, given its connection to everything from beverage cans and kitchen foil to aircraft components, automotive parts, and construction materials. Other major industrial companies, including ExxonMobil (XOM) and U.S. Steel (X), report later this month. General Electric (GE) will report earnings on July 14.


  Alcoa has obviously profited from higher aluminum prices, driven by increased demand around the globe. The company charged outside customers $2,728 a ton for aluminum in the second quarter, up 38% from a year earlier. "This was a great quarter," Chairman and Chief Executive Alain J.P. Belda told industry analysts during a late-afternoon conference call. "We've had two great quarters back to back."

But Belda conceded: "We don't expect this to be repeated in the third quarter." One reason is that lengthy holidays in Europe and annual shutdowns by the U.S. automobile industry weaken consumption. Another, more troubling reason is that aluminum prices are slipping as output has climbed. Chief Financial Officer Joseph Muscari said contract prices will decline 6% in the third quarter from the just-concluded period.

Over the longer term, however, the Alcoa executives remain bullish. They predict aluminum consumption will double by 2020, which is why management has already spent $1.32 billion on capital projects in 2006. But if there were any doubts, it's now clear that the trend line is not going to be smooth one.

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