Alcoa Aims for $6 Billion Quarter

Alcoa is set to kick off earnings season once again on Monday, and there's a good chance the aluminum giant will deliver a fifth straight above-consensus quarter.

The Pittsburgh company is the third-largest producer of aluminum in the world, making it not only a barometer for health of the industry but a good gauge on the health of the manufacturing sector as well. It's always the first component of the Dow Jones Industrial Average to report its results.

Alcoa's shares tend to take their cue from aluminum's price on the London Metal Exchange -- the only market in the world that trades the metal.

For the quarter that closed on June 30, the LME quote fell by about 3.1%, or $80 per ton, to roughly $2,510. Aluminum hit a high of $2,770 per ton in late April, but dropped sharply as member firms sold off into May. The pullback in Alcoa's stock was deeper as the shares slumped 9.2% over the same three-month period to $15.86. The stock has bounced a bit in July, however, closing Friday at $16.38.

Year to date, the shares have gained 7%. Over the past 52 weeks, the jump is much more dramatic, an increase of nearly 54%, although the high for the year of $18.47 occurred on April 8.

The average estimate of analysts polled by Thomson Reuters is calling for earnings of 33 cents a share in the June period on revenue of $6.32 billion, a performance that would reflect strong year-over-year gains for the company from last year's equivalent profit of 13 cents a share on revenue of $5.19 billion. An in-line quarter would allow the company to deliver its first $6 billion revenue quarter since September 2008.

The difference between this year and last year is higher aluminum prices and volumes as demand crept up.

"We still do have a better economy than a year ago and volumes are up because of it," says Tim Hayes, research analyst at Davenport & Co.

Alcoa should also see some benefit from strong aluminum delivery premiums, specifically in the U.S. Midwest and Europe, says Tony Robson, an analyst at BMO Capital Markets.

Morningstar analyst Bridget Freas, however, says delivery premiums matter more to traders.

"From the producer's standpoint, what matters is the aluminum price," Freas says.

Davenport's Hayes says that he expects the company's revenue to jump because of ongoing production for the aerospace industry. Alcoa signed a $1 billion contract in June to provide aluminum for Airbus commercial aircraft.

Another positive catalyst is that alumina facilities experienced an expansion in Brazil, and many previously dormant smelters reopened during this latest quarter.

Late last year, the Chinese government shuttered its high-cost smelters amid rising energy costs. China's aluminum industry has since cranked up its output to a 3.6-million-ton annual rate. That boom was good enough to catapult China's market share back to 40% of the market.

"The value-added business is going to expand given that some of the key industries like automotive, like consumer electronics, like aerospace are continuing to grow massively," CEO Klaus Kleinfeld told TheStreet in late June about Alcoa's future in China.

Alcoa may also see progress in its flat rolled and engineered products business as the "green" industry and automobile sector use more aluminum in their products. Aluminum is lightweight and durable, and these qualities give it an edge with green technology when compared against other metals.

Demand for the material has increased in the auto sector too, according to Morningstar's Freas, who believes even a small boost would be huge for Alcoa because cars are almost entirely made of steel.

Freas is expecting a "pretty bang-up quarter" from the company after Monday's closing bell.

Headwinds for Alcoa in the quarter could include foreign currency fluctuations and rising production costs.

Sentiment on the stock is mixed ahead of the report. Of the 16 analysts covering the stock, one is at strong buy, seven are at buy, five are at hold, two are at underperform and one is at sell, making for an even eight-and-eight split between the bulls and the bears.