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Greenberg: Alcoa Earnings Not as Rosy as They Might Appear

A worker walks among rolls of semi-finished aluminum at the Alcoa aluminum factory in Szekesefehervar, Hungary.
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A worker walks among rolls of semi-finished aluminum at the Alcoa aluminum factory in Szekesefehervar, Hungary.

With Alcoa coming in with better-than-expected results, one thing to keep in mind: It should all be kept in perspective.

Yes, revenue and earnings were up—but:

At $5.1 billion, an improvement over the prior quarter, revenue was still below two quarters earlier and well below the $8 billion peak in June 2007. In fact, revenue wasn’t this low since 2003.

And while net income was a positive $136 million, that’s still one of the worst among the positive quarters in 10 years.

On the good news front, free cash flow was positive, but a good part of that came from continued lower spending.

It would have been stronger if the company hadn’t done away with a program to sell receivables. However, it’s unclear how regular receivables were sold and the company gave little detail on its earnings call.

And as Ken Hackel of Credittrends.com points out, free cash flow in prior quarters was puffed up by the transfer of $600 million of stock—not cash—in a master trust for the company’s pension fund.

(Memo to me: Look into these in-kind stock transfers to pension funds.) For what it’s worth: Hackel says in the past some companies did these stock transfers as a form of a takeover defense.

By using stock instead of cash, Alcoa no doubt believes its stock is a bargain. However, since the stock transfer occurred in January, Alcoa’s stock price has fallen by about 15 percent.

One other point to consider: Net debt of $8.4 billion at Alcoa, while below last year’s highs, remains at the high-end of its 10-year range and is headed in the wrong direction. At least $1.5 billion is due over the next year-and-a-half.

My take: When companies “beat” earnings it’s important to keep it in perspective. Sometimes it may taste better, but is considerably less filling.

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