Alcoa Slumps as Jets-to-Metals Slowdown Dims Earnings Prospects

  • First-quarter net income fell 92 percent to $16 million
  • Metal consumption now seen climbing 5%, down from 6% forecast

Alcoa Inc. fell the most in three weeks after cutting projections for its largest manufacturing unit on slowing demand for metal parts.

As the biggest U.S. aluminum producer prepares to split itself in two, it’s contending with lower prices and margins, with Chinese demand for commodities slowing and one of its main customers, Boeing Co., halving production of its biggest jet. The stock fell 5 percent to $9.25 at 10:32 a.m. in New York after the release of quarterly results late Monday.

Alcoa is under “enormous pressure” from aircraft manufacturers, Chief Executive Officer Klaus Kleinfeld said Monday on a call with analysts to discuss the results. “And they are under pressure from their customers. We will have to continue to win through innovation.”

Engineered Products and Services, which will be the largest segment of the new downstream company to be called Arconic, will generate sales of as low as $6 billion this year, compared with an earlier forecast for $7 billion, as margins tighten. Smelting and refining operations will form a separate company that will retain the Alcoa banner, under a plan revealed in September.

“There will be some disappointment” on the outlook for engineered products, said Anthony Young, an analyst at Macquarie Group Ltd. “This is the cornerstone of Arconic and if that business isn’t as good as they previously thought, it may negatively impact the longer-term valuation.”

Profit Sinks

First-quarter net income fell 92 percent to $16 million as operating profit plunged in the units that make alumina and primary metals, the New York-based company said in a statement Monday. Profit excluding one-time items was 7 cents a share, beating the 2-cent average of 14 estimates compiled by Bloomberg.

Alcoa shares have lost 30 percent in the past year, in line with the Bloomberg World Mining Index’s decline. A gauge of manufacturing shares is down just 4 percent in the same span. Tuesday’s decline was the steepest since March 23.

“While 1Q16 results were solid relative to expectations, the outlook for the remainder of the year versus expectations is not positive for the highest-valued downstream segments,” David Gagliano and Matt Cartoceti, analysts at BMO Capital Markets, wrote in a note to clients.

Metal Overhaul

The portion of Alcoa’s revenue that comes from selling the primary metal and its precursor alumina has dropped to 40 percent as prices have tumbled and Kleinfeld has shut down and sold off smelting capacity.

Meanwhile, he has bolstered segments that shape and form the metal by expanding automotive-product capacity, retooling existing factories and buying companies such as aerospace supplier Firth Rixson Ltd. Alcoa’s key customers in aircraft production and automotive manufacturing have seen record production, while vehicle lightweighting has boosted the amount of aluminum in cars and trucks in North America.

Alcoa lowered its forecast for global consumption of the metal this year and decreased its market deficit projection as Chinese demand growth slows. In aerospace, Alcoa is projecting 6 percent to 8 percent global aerospace sales growth in 2016, revised from the 8 percent to 9 percent estimated in January.

Alcoa cut 600 jobs in the engineered products and solutions unit in the first quarter, and plans a further reduction of 400. Additionally, given the current market environment, it is evaluating another reduction of as many as 1,000 positions, the company said.

“Aluminum, while still being a metal where you have pretty attractive growth markets, that’s been pared back a little bit,” Macquarie’s Young said. “A portion of that’s China and a portion of that is other cross currents.”

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