Aluminum companies have been plagued by the problem of overcapacity as supplies haven’t been matched by demand levels, leading to surplus stocks that have led to sharp declines in aluminum prices. Alcoa Inc (NYSE:AA) announced its earnings on July 8, after the market closed.
The shares popped up 2% in the after-market hours as the company reaffirmed 7% growth in aluminum demand for the year. However, investors seem to be discussing whether the growth in supplies will be more or less than the growth in demand. Let’s have a look at what the Street has to say.
Earnings season on a go
For the time being, the Street seems to have a pessimistic outlook on these companies. Recently, the Street lowered Q2 estimates for the three U.S. aluminum companies, all primarily due to a lower underlying aluminum price versus the consensus estimate for the quarter. Specifically, the Q2 estimate for Alcoa Inc (NYSE:AA) was lowered from $0.13 to $0.07, for Century Aluminum Co (NASDAQ:CENX) from -$0.08 to -$0.11, and for Noranda Aluminum Holding Corporation (NYSE:NOR) from -$0.13 to -$0.15.
However, Alcoa Inc (NYSE:AA)’s EPS of $0.08 topped the Street’s estimate and clearly showed that the sentiment for the industry was at its worst. The top line, however, remained below estimates at $5.8 billion. Two important factors to be considered in an aluminum company’s earnings release are: a.) average realized price for aluminum and b.) shipments of aluminum products.
Alcoa Inc (NYSE:AA) announced that the average realized price for aluminum was $2,237/metric ton (which came in -4% on a year-over-year basis). Shipments of aluminum products declined 2.8% on a year-over-year basis. As already mentioned, the company reaffirmed FY 2013 projections of 7% global aluminum demand growth, particularly for use in automobiles and airplanes.
Most of the EPS beat came from stronger-than-anticipated results from two of Alcoa’s segments that are alumina and engineered products. Alumina is a key ingredient in production of aluminum and is extracted from bauxite through a refining process. The engineered products segment continues to benefit from strong aerospace and automotive demand, and Alcoa Inc (NYSE:AA) expects profitability for the segment to continue to improve as it enters new, higher margin products.
Given a declining demand environment, investors were also wary of cash reserves with the company. Alcoa Inc (NYSE:AA) generated $228 million in free cash flow for the quarter. The days’ working capital was a Q2 record low of 27 days. Goldman remains negative on the supply-demand fundamentals of aluminum. While a significant amount of global capacity is operating below cash-cost levels (excluding regional premiums), aluminum fundamentals could keep pricing under pressure. With flattish aluminum prices in 2013, Alcoa is expected to generate negative free cash flow of $1.1 billion.