Alcoa Comes in Well Below Estimates

For Au's preview heading into the Alcoa conference call, please click here.

Alcoa (AA - commentary - Cramer's Take) reported a fourth-quarter loss of $1.15 a share on sales of $5.7 billion. Of this, 76 cents a share represented special charges for downsized operations, meaning that the adjusted loss per share was 39 cents, decidedly worse than the 10-cents-a-share consensus. The sales figure was in line with estimates, meaning that margins were below expectations.

The main culprit was low prices for the base metal toward the end of last year. More worrisome than these prices are rapidly rising inventories due to declining shipments as customers trimmed purchases.

"Exchange" inventories were 41 days' sales at the end of the fourth quarter, versus 29 days at the end of the third quarter. This, in turn, reflects a recent 3% collapse in global demand and fears of a further decline in 2009, officially estimated at 2%, but which could go to a high single-digit percentage.

In response, Alcoa is planning a 18% curtailment of raw aluminum production vs. a projected 13% global curtailment. This is occurring as U.S. auto companies, major end-users, announce they need more aid than the government is offering to survive.

Alcoa is concentrating on what is most controllable, namely costs. These include a 28% year-over-year decline in SG&A, expense. A stronger U.S. dollar and falling energy prices are now coming into play, but all of them with a time lag. Efficiencies from a ramp-up in a new plant in Iceland will also be factor. Margins should rebound off fourth-quarter 2008 lows, even if quarterly revenues don't rise. We now estimate a breakeven result on $22 billion of sales in 2009.

The greatest weakness is in flat-rolled products (the most commodity-like, and with end markets in autos and housing), which means that capacity reductions will hit this area hardest. Also on the agenda is the closing of a smelter in Tennessee.

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At the time of publication, Au was long Alcoa, although holdings can change at any time.

Thomas P. Au, CFA, is a principal with R. W. Wentworth, a financial services firm in New York City. Earlier he was an emerging markets portfolio manager for the investment arm of Cigna Corp. and an analyst with Unifund, S.A. of Switzerland and Value Line. He graduated cum laude with a B.A. in Economics and History from Yale University and an M.B.A. in Finance from New York University. Au is the author of A Modern Approach to Graham and Dodd Investing. Au appreciates your feedback; click here to send him an email.