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Alcoa Inc (AA), Century Aluminum Co (CENX): Why You Should Not Bet On This Stock’s Q2 Earnings

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This season’s earnings results have impressed so far, with a majority of the companies meeting or beating analyst expectations. For some, it has been a major surprise to the investment community, while for others things came as expected. One of the main surprises came from Alcoa Inc (NYSE:AA) , the company that kicked of the second quarter earnings season after beating analyst expectation.

Alcoa Inc (NYSE:AA)

Many expected Alcoa Inc (NYSE:AA) to miss expectations in the most recent quarter, following its struggle to report meaningful margins from its Aluminum Corp. of China Limited (ADR) (NYSE:ACH) production unit. The unit accounts for about 36% of Alcoa’s revenues, making it critical to the company’s performance. Over the recent past, Alcoa Inc (NYSE:AA) has been trying to reduce its dependence on aluminum production by cutting down its smelting capacity.

Alcoa Inc (NYSE:AA) is one of the companies involved in the production and distribution of primary molten aluminum, and faces stiff competition from China’s Aluminum Corp. of China Limited (ADR) (NYSE:ACH). Century Aluminum Co (NASDAQ:CENX) is also another competitor in the industry, but trails the big two. All three of these companies have been struggling against declining aluminum prices over the last two years, falling from about $1.25 per pound to about $0.80/lb, which is about a 36% decline.

“Positive” results?

Alcoa Inc (NYSE:AA) reported $5.8 billion in revenues from the most recent quarter against falling aluminum prices, as sales volumes improved massively year-over-year. The company’s realizable aluminum prices fell by $161/ton, triggered by a net cash price decline of 8% at the London Metal Exchange (LME). According to the company’s CFO, William Oplinger, the 2% decline in revenues and 4% decline in realizable aluminum prices was a subject of lower LME and improved productivity across other business units. The company posted a net loss of $119 million compared to a loss of $2 million reported the same period last year. In Q1, 2013, Alcoa reported a net profit of $149 million.

Reliance on aluminum must be trimmed

Alcoa Inc (NYSE:AA) is facing serious problems wrapped around its business model. These problems won’t be solved by reporting massive sales, or what others might refer to as overproduction. If anything, massive production will only continue to put aluminum prices down, which could result in margins declining to unmanageable levels. Nonetheless, Alcoa understands this very well, and is instead looking to cut down on its smelting business.

The company’s aluminum production unit is squeezing gains reported from other business units, which also include the production of aluminum-related products.

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