Alcoa's Q3 Profits Soar Above Street Expectations

Aluminum producer Alcoa  beat Wall Street expectations with its third quarter earnings report on Tuesday, posting earnings per share of 11 cents and revenue of $5.77 billion. Street estimates were five cents per share and $5.6 billion in revenue, according to a consensus report from Thomson Reuters.

In a statement announcing the earnings, Alcoa chairman and CEO Klaus Kleinfeld says that the results indicate that the repositioning of the company is on the right path. “Our commodity business delivered better performance in a tougher market environment, and we continued to reshape the portfolio to lower the cost base,” he says. “Across the board, productivity was exceptional – achieving our full year target in the first nine months.”

Third quarter net income is $24 million, a significant improvement over this time last year, when income for the third quarter of 2012 was a net loss of $143 million.

Alcoa says that these strong results were led Engineered Products and Solutions and Global Rolled Products, which posted after-tax operating income of $192 million and $71 million, respectively.

In a note released by Citi Research early Tuesday evening, analyst Brian Yu tempered the positive earnings report, saying, "The stronger 3Q result will likely be tempered by weak 4Q downstream guidance." Yu said that settlement discussions with the DOJ and SEC regarding the previously disclosed Alba investigation continue, which may lead to additional charges in future quarters.

Alcoa reaffirmed its 7% global aluminum price forecast for 2013, projecting particular growth in the aerospace (9-10%) and commercial building and construction (4-5%) markets.  In the heavy truck and trailer market, it is raising its 2013 growth expectation to 5-9%, up from its previous prediction of 3-8%, citing improvements in the European market and a stronger Chinese market

The company’s primary metals unit – the sector recently targeted by a Deutsche Bank analyst as a prime candidate for a spinoff – posted a third quarter after tax operating income of $8 million, compared to a negative $32 million in the second quarter of 2013 and a negative $14 million in the third quarter of 2012. Despite this gain, primary metals is still the weakest of Alcoa’s units, falling $59 million shy of alumina’s $67 million income and $191 million shy of Alcoa’s Engineered Products and Solutions unit.

Of Alcoa's smelting capacity, also targeted by the Deutsche analyst as an area of concern, 16%, or 651,000 metric tons, is offline.

 The better-than-expected earnings is welcome good news for Alcoa, which in September was booted from the Dow Jones industrial average, and earlier this year saw its credit rating cut by Moody’s, which cited concerns over weak global aluminum prices.

Shares of Alcoa, which were down 0.38% at the bell, were up 1.76% in after-hours trading. However, shares of the company are down over 12% year-to-date. Alcan parent Rio Tinto is up 0.17% year to date, while the Aluminum Corporation of China is down 13.7% year to-date.

While Alcoa has traditionally been viewed as the informal start to earnings season – and indeed, the number of companies reporting earnings will increase as the week goes on, and JP Morgan and Wells Fargo report on Friday – its performance should not be seen as an overall indicator for the economy nor its corporate counterparts. As has been previously reported, research shows that whether Alcoa beats or falls short of the Street’s consensus is not predictive of the next three months.