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Alcoa Earnings Preview: How Not to Make Money in Commodities

Tuesday, 8 Jul 2008 | 9:23 AM ET

ALCOA (AA)

One of the largest aluminum companies in the world. Does everything from mining bauxite to refining aluminum to selling products made from the metal for use in cars, planes and, of course, beer and soda cans. Dow Component.

Reports Q2 earnings Tuesday 7/8 at approx. 415p ET. Conference call at 5p ET.

AP

WHAT WILL MOVE THE STOCK:

RISING MATERIALS COSTS - It's painfully obvious that energy costs have soared. How big a bite did they take out of Alcoa's bottom line? Cost concerns have driven a series of recent profit estimate cuts and certainly contributed to Alcoa's weak stock performance. (See Factoids for the ugly specifics).

PRICING POWER? - Fuel costs wouldn't hurt so much if Alcoa could demand higher prices. However, aluminum hasn't kept up with other commodities, especially oil. A number of analysts are looking for aluminum prices to jump roughly 25% to $4,000 per metric ton by the end of the year. Despite these expectations for price increases, Alcoa's Q2 revenues are predicted to fall 9% while full-year 2008 are expected to drop 3%. Will demand from developing countries make up for weaker demand in the U.S. and Europe?

AUSTRALIA DISRUPTION - This will complicate reading Alcoa's numbers. On June 10, Alcoa of Australia said an explosion at one of its natural gas suppliers caused them to cut production and declare force majeure under its alumina supply contracts. Alcoa said the disruption would shave between two and three cents per share from Q2 earnings. Will analysts include this hit? Probably. Thomson Reuters says all three analysts who've mentioned the force majeure in their notes said they'll include the charge. However, that leaves an even dozen who haven't said anything yet.

THE NEW GUY - CEO Klaus Kleinfeld took the helm of Alcoa in May and already some are warning that a turnaround could take a while. JPMorgan analyst Michael Gambardella downgraded Alcoa to neutral from overweight on June 11 and said short-term investors would be "disappointed" with Kleinfeld's decision not to sell off its downstream operations. However, long-term investors may want to keep an eye on Alcoa. Gambardella does like the plan to keep the downstream business.

DOWNSIDE RISK? - Seven of the 15 analysts following Alcoa have cut their estimates since the end of June, according to Starmine. Two of the analysts dropped their estimates on Tuesday morning. Their moves were enough to shave four cents off the consensus estimate.

ESTIMATES:

Q2 EPS down 20% to $0.64, revenues down 9% to $7.358 billion

Q3 EPS up 14% to $0.73, revenues up 1% to $7.484 billion

FY 08 EPS up 3% to $2.68, revenues down 3% to $29.677 billion

Source: Thomson Reuters

Year-ago actuals: Q2 EPS $0.81, Rev. $8.066 billion

*All estimates are current as of 7/8 and subject to change.*

FACTOIDS:

DOWN 25% IN SIX WEEKS - On May 19, Alcoa closed at a ten-month high of $44.59. Since then, the stock has fallen 25%.

Editor's Desk: Earnings and Oatmeal

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