Alcoa earnings exceed estimates after aerospace orders increase

Alcoa Inc., the largest US aluminium producer, reported earnings that beat analysts’ estimates after a better-than-expected performance at its unit that supplies components to aerospace and power companies. Profit excluding expenses related to output cuts and a legal settlement were 7 cents a share, the New York-based company said in a statement Monday after the close of trading, beating the 6-cent average of 15 estimates compiled by Bloomberg. Sales fell 1.9% to $5.85 billion, surpassing the $5.79 billion average of nine estimates.

Alcoa’s engineered products and solutions business saw operating income rise 12% from the first quarter, surpassing the 5% improvement forecast by the company back in April. It’s boosting sales at downstream divisions as chairman and chief executive officer Klaus Kleinfeld tries to reduce Alcoa’s historical reliance on aluminium smelting, which has been hit by a slump in metal prices.

“Aerospace is really what’s driving engineered products,” said Lloyd O’Carroll, an analyst at Davenport and Co. in Richmond, Virginia, who recommends buying the shares. “Revenues are growing, and growing pretty strongly. Margins are continuing to improve.”

The company makes aircraft wings and fasteners used to attach fuselages, wings and engines to one another. The civil aviation market is in an upswing, with Boeing Co. and Airbus SAS securing orders for 848 aircraft worth $129 billion at June’s Paris Air Show, adding to a backlog already stretching several years for some models.

‘Strong’ segment

“Alcoa will benefit from all of this as our position in this segment is very, very strong,” Kleinfeld said on Monday on a conference call with analysts.

Alcoa is the first member of the Dow Jones Industrial Average (DJIA) to report quarterly results. Alcoa’s shares have fallen 8.8% this year through Monday’s close, the worst performance on the DJIA.

“The aluminium producer’s status as a bellwether for the stock market has diminished along with its clout and credit rating,” Richard Moroney, editor of Dow Theory Forecasts newsletter said in June.

"Investors are looking beyond Alcoa, which in the past 11 years has lost its position as the world’s largest metals company to BHP Billiton Ltd,” Paul Hickey, co-founder of Bespoke Investment Group, said in April. Moody’s Investors Service cut its rating on Alcoa’s $8.6 billion of debt to junk in May, citing the decline in aluminium prices.

Aluminium cuts

Aluminium for delivery in three months, the most active contract on the London Metal Exchange, has fallen 13% this year. It traded at $1,758 a metric tonne on 27 June, the lowest since July 2009.

While the alumina, flat-rolled and engineered products units all recorded an operating profit for the quarter, the primary metals business—Alcoa’s largest by sales—swung to a $32 million loss.

Alcoa has confirmed the closing of 149,000 tons of aluminium-smelting capacity so far in 2013, on top of 531,000 tons of cuts last year, as it tries to improve the competitiveness of its smelters. More shutdowns are likely as it reviews the future of other plants accounting for about 11 percent of capacity.

The company’s second-quarter net loss widened to $119 million from $2 million a year earlier. The average of five analysts’ estimates was for a net income of $59.3 million.

Alba costs

The unexpected loss came after Alcoa recorded $42 million in expenses related to production cuts at a Quebec smelter. It also took a $62 million charge on a proposed settlement with the department of justice over its investigation into allegations of corruption in connection with alumina sales to Aluminium Bahrain BSC. Alcoa also said a settlement proposed to the Securities and Exchange Commission over the same allegations was rejected by the regulator.

Alcoa maintained its estimate that global aluminium demand will rise by 7% this year, led by 11% growth in China. Demand will exceed supply by 315,000 tonnes, the company said in presentation slides for the conference call.