Alcoa Beats Estimates as Aluminum Smelting Unit Recovers

Alcoa Inc., the struggling U.S. aluminum producer that’s shifting its focus to manufacturing auto and aerospace components, reported better-than-expected profit on the strength of its traditional aluminum smelting business.

Second-quarter profit excluding restructuring costs and other one-time items was 18 cents a share, the New York-based company said yesterday, beating the 12-cent average of 17 estimates compiled by Bloomberg. Sales were little changed from a year earlier at $5.84 billion, compared with the $5.65 billion average estimate. Alcoa rose as much as 4.4 percent.

The primary metals unit, which smelts aluminum, had $97 million in after-tax operating earnings compared with a $32 million loss a year before. That boosted Alcoa’s bottom line, even after the segment’s output shrunk as Chairman and Chief Executive Officer Klaus Kleinfeld shuttered inefficient plants. Profit was unchanged at the global rolled-products business, which Alcoa is expanding.

“There’s much more growth potential for the primary business than for the global rolled business even though management spends a lot more time talking about the global rolled business,” Andrew Lane, an analyst at Morningstar Inc. who has a hold rating on the stock, said in an interview.

An aluminum smelter for over a century, Alcoa now prefers to call itself a lightweight metals technology company. It has worked to reduce its dependence on the price of raw metal by boosting sales of specialized shapes and alloys. Two weeks ago, Alcoa announced the $2.85 billion purchase of U.K. aerospace parts maker Firth Rixson Ltd., its biggest takeover in 14 years.

Higher Premiums

“That’s where the growth is, that’s where the margins are, but that’s a long-term process,” Lloyd O’Carroll, a Richmond, Virginia-based analyst at NorthCoast Research LLC, said in an interview.

The primary metals unit saw its average realized aluminum price rise 2.4 percent to $2,291 a metric ton in the quarter, the highest since the first quarter of 2013. That was helped by a jump in premiums, or the surcharge customers pay on top of benchmark aluminum prices.

Premiums were helped by rising aluminum demand, delays to deliveries of stockpiled metal from warehouses, and the closing of high-cost smelters.

While it maintained its 2014 global forecast for aluminum demand growth at 7 percent yesterday, Alcoa predicted a wider supply-demand deficit at 930,000 tons, compared with an April projection for 730,000 tons.

Truck Parts

Second-quarter net income was 12 cents a share, compared with an 11-cent loss a year earlier. Alcoa also reported $302 million in productivity gains in the period.

After-tax operating income was unchanged at the rolled products segment, a supplier of aluminum sheets to car, airplane, and packaging manufacturers. Its earnings in the third quarter will decline 15 percent sequentially, mainly because of weaker seasonal demand, Alcoa said in a presentation to analysts.

Profit at the engineered products division, which makes components for jets and truck wheels, rose 5.7 percent to $204 million. For the third quarter, its earnings will rise as much as 10 percent from a year earlier, Alcoa said.

The shares rose 2.8 percent to $15.26 at 9:57 a.m. in New York, after earlier posting the biggest intraday gain in three months. They have advanced 44 percent this year.

Alcoa is the first company in the Standard & Poor’s 500 Index to report earnings. Alcoa’s quarterly reports mark the traditional start of the earnings-report cycle, dating to the decades the company spent in the Dow Jones Industrial Average.

In September, Alcoa was removed from the DJIA after the stock slumped more than 80 percent from its 2007 high. Four months earlier, its credit rating was cut to junk by Moody’s Investors Service after the aluminum price fell amid a global oversupply.

(Updates share price in third-from-last paragraph.)
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