Alcoa Profit Exceeds Estimates After Aerospace Segment Gains

Alcoa Inc., the largest U.S. aluminum producer, reported better-than-forecast quarterly earnings after its smelting business returned to profitability and results improved at a unit that makes auto and aerospace parts.

Third-quarter net income excluding plant-closing costs and other one-time items was 11 cents a share, New York-based Alcoa said in a statement yesterday. The engineered products division, a supplier of aerospace companies such as Boeing Co. and Airbus SAS, saw after-tax operating income rise 22 percent to $192 million, while the primary metals business earned $8 million.

Alcoa’s so-called downstream divisions -- which make rolled, forged and extruded aluminum products -- have accounted for a growing proportion of the company’s revenue in the past year. They’re the focus of efforts by Chairman and Chief Executive Officer Klaus Kleinfeld to reorient Alcoa to capitalize on rising demand for high-tech components in the latest generation of cars and commercial aircraft.

“You see the increased importance of the downstream business and the continued growth and profitability,” Kleinfeld said in a phone interview yesterday. “The share price is undervalued and has not built in the repositioning that we are undergoing but I believe it will get there.”

The earnings were published after the close of regular trading in New York yesterday. The shares rose 3.4 percent to $8.21 at 11:21 a.m. local time today. They earlier gained 4.4 percent, the most intraday since April 2012.

Price Decline

Net income was 2 cents a share in the quarter, compared with a 13-cent loss a year earlier. Sales fell to $5.77 billion from $5.83 billion, beating the $5.63 billion average estimate.

Alcoa, typically one of the first U.S. companies to report quarterly earnings, was removed from the Dow Jones Industrial Average on Sept. 10 after 44 years. As well as the 8.5 percent drop in its share price so far in 2013, Alcoa’s credit rating was cut to junk by Moody’s Investors Service in May. While the company invests in its downstream operations, its smelting business is under pressure from a decline in aluminum prices.

Aluminum futures on the London Metal Exchange averaged $1,845 a metric ton in the quarter, down 13 percent from a year earlier. Global output has exceeded demand for a ninth straight year, according to data compiled by Bloomberg. It traded at $1,758 in June, almost a four-year low.

Despite the slide in prices, the primary-metals unit made a third-quarter profit, compared with a year-earlier loss of $14 million, because of efficiency gains and favorable foreign-exchange rates, Alcoa said. The average of three analysts’ estimates was for a $30 million loss.

Customer Inventories

Alcoa reiterated its estimate that global aluminum demand will grow by 7 percent this year. Demand growth in China will be 12 percent, up from a previous view of 11 percent. Demand from the global aerospace industry will grow as much as 10 percent and auto demand growth will be as much as 4 percent, the company said in a presentation on its website.

The rolled-products unit, whose customers include the aerospace and packaging industries, posted an after-tax operating profit of $71 million in the quarter, down from $89 million a year earlier. The segment that mines bauxite and refines alumina saw earnings rise to $67 million, from a year-earlier loss of $9 million.

Alcoa said fourth-quarter earnings in rolled products excluding one-time items will drop 25 percent from the third quarter. That would mean a year-on-year decline of about 31 percent. Some of the division’s shipments to aircraft manufacturers will be lower because of the inventories that some customers have built up as they introduce new aircraft models, Kleinfeld said on a conference call to discuss results with analysts.

“Guidance looks disappointing,” Brian Yu, an analyst at Citigroup Global Markets Inc. said in a note. “We were expecting rolled products to hold steady.”

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