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Tickers in this Article: AA, RTP, ACH, BHP
Alcoa's (NYSE:AA) first-quarter earnings plummeted 54% the company reported on Monday, blaming skyrocketing raw material and energy costs coupled with a weak U.S. dollar. With sales coming in ahead of expectations and profits coming in below, the rising costs of commodities is turning out to be a negative for the company.

Profit Miss
The company chose to title its news release: "Alcoa Reports Strong First Quarter 2008 Results In The Face Of Challenging Economic Conditions". Economic conditions are challenging, that much is true, but to state the company had a strong quarter is a bit of a stretch.

Alcoa reported net income for the first quarter of $303 million (37 cents per share) down from $662 million (77 cents per share) a year earlier. Stripping out the impact of restructuring charges and taxes, operating profit came in at 44 cents per share down from 79 cents per share in 2007. Either way, results were worse than consensus analyst expectations of 48 cents per share.

Higher Costs Hit Hard
The only quasi-strength was in revenue. Sales came in at $7.38 billion, from $7.91 billion a year earlier. This was a nearly 7% decline, but came in higher than the $7.18 billion that analysts anticipated. The revenue and profit disparity shows the company's costs are the real problem. Alcoa has been suffering from higher energy costs and input costs for materials like bauxite.

Aluminum prices have risen 24.5% in the last three months. This sounds like it should be good news for the world's third largest aluminum producer. However bauxite costs, the main component of aluminum, are rising also and eating into Alcoa's bottom line. Despite the 7% decline in revenue, cost of goods sold only fell 1.9% to $5.98 billion. Other areas were very disappointing for Alcoa as well, such as lower than expected pricing on its Aluminum sales, and lower than expected production. (To learn more about margin pressure, check out Measuring Company Efficiency and Operating Leverage Captures Relationships.)

Looking Forward
Alcoa made many investments over the quarter, including investing in a new bauxite mine and a refinery in Brazil. The company also bought 12% of competitor Rio Tinto (NYSE:RTP) in a joint purchase with Aluminum Corporation of China (NYSE:ACH). The $14 billion deal, of which Alcoa contributed just $1.2 billion, was seen as an effort to block BHP Billiton's (NYSE:BHP) purchase of Rio Tinto. Overall the company does have some avenues for growth, and a successful bauxite mine could help reduce costs, but for the time being I think the shares will continue to be squeezed.

The Bottom Line
Alcoa reported disappointing numbers for its first quarter. Earnings, aluminum production and pricing all came in below expectations. Revenue beat estimates, but only served to underline the cost pressure Alcoa is facing. I think the company has some attractive routes for future growth, but considerable pressure will remain on the company's bottom line and the stock in the near term.

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