Alcoa Earnings Preview: Q408

Alcoa [[AA]] is scheduled to report fourth quarter 2008 results after the market closes on Monday, January 12. Based on our analysis, we at are expecting AA to report in-line results that meet Wall Street’s recently reduced expectations.


Analyst Expectations

We are forecasting revenues of $5.42 billion and EPS of ($.03). This would represent a 28% decline in revenues from last year’s $7.39 billion in the same period. The current analyst consensus calls for revenues of $5.41 billion and ($.05) EPS. On October 6, the company pre-announced revenue of $337 – 342 million and EPS within the previous guidance range of $0.26 – 0.34.


Since mid-July of last year, aluminum prices have been in free fall – down over 50% during that time. Alcoa, as the world’s largest aluminum producer, has fallen right along with it.


However, the company is committed to maintaining profitability through this economic storm and has made moves to address their expense structure. On January 6, they announced they would cut over 15,000 jobs and will sell off four of its non-core business units. In addition, they have cut capital expenditures in 2009 by 50% to $1.8 billion.


These restructuring programs are expected to save about $450 million before taxes on an annualized basis. However, there is still concern over whether the cuts have gone deep enough. The combination of excess supply and falling global demand may require Alcoa to make further cuts in the not too distant future.


Share Performance

Alcoa’s shares are down 75% from their 52-week of $44.76 on May 2008. In 2008, it was the second-weakest performer in the Dow Jones Industrial Average during 2008. However, since hitting a new 52-week low in November, the stock has rallied 60%.


Unfortunately, Alcoa’s share price is strongly linked to aluminum prices which have little prospects for appreciation in the near term. In fact, we would not be surprised for prices to fall another 20% before hitting bottom.



Shares are now trading at 60x consensus 2009 EPS estimates. This high multiple valuation combined with a heavy debt load of over $10 billion will continue to pressure the stock price in 2009.


Recommendation: Hold off purchasing until the Board announces their plans for 2009 dividend payments. There will be plenty of buying opportunities in the coming months.


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