Alcoa Beats the Street
Tuesday, April 10, 2007SUSIE GHARIB: Earnings season got off to a good start today as Alcoa topped quarterly estimates. The aluminum giant said after the bell today that it posted the strongest first quarter in its history. Alcoa earned $0.79 a share, $0.03 more than expected. Revenues also came in better than expected, up 11 percent to $7.9 billion. The company said its earnings benefited from higher metals prices and sales to the aerospace, (AUDIO GAP) industries. Thanks to that demand, aluminum prices rose more than 15 percent in the quarter. Alcoa shares closed the regular session at $34.90, up $0.03 and rose slightly in after hours trading.
PAUL KANGAS: We're joined now by Scott Burns, aluminum analyst at Morningstar. Scott, welcome back to NIGHTLY BUSINESS REPORT.
SCOTT BURNS, ALUMINUM ANALYST, MORNINGSTAR: Thanks Paul.
KANGAS: Give us your read on Alcoa's numbers out late today.
BURNS: Well, the numbers were surprisingly strong. I say surprisingly because the company has had a fairly inconsistent track record the past couple quarters. Earnings were up almost 9 percent and it kind of goes in line with where aluminum prices are. So the big challenge for this company in the past few quarters has really been keeping costs in line. The aluminum price is going to fall where it does but it's all up to the company to execute. So things look pretty strong for the company.
KANGAS: Will the metals market remain strong, do you think?
BURNS: I think so. I think you've got a lot of demand in the developing countries, the Brit (ph) countries, Brazil, Russia, India and China, especially China, and also aluminum especially, a strong tail wind from the aerospace sector. We think here at Morningstar that there's going to be a long-term secular demand for airplanes going forward on the scale of 10 to 12 years. So aluminum is going to be the beneficiary of that.
KANGAS: But what about the weakness in the housing and automotive sectors? Will that be a factor for the big aluminum producers?
BURNS: I keep getting asked this question about housing but there's surprisingly little aluminum in a house. The days of aluminum siding are well behind us. Vinyl and plank siding if you're really taking care of it and there's no real wiring in the house. So aluminum is actually very insulated from the housing sector outside of high-powered tension lines that would go to new subdivisions.
Auto would be a stronger concern. The aluminum companies work very hard to get more aluminum per pound into a vehicle, but, you know, we're seeing kind of a soft patch and you can't allow the bad numbers at GM and Ford to really paint the whole picture on North American auto production. It's still going to be strong. It's just going to be done by different companies.
KANGAS: Understood. Alcoa was the star of the Dow Industrial Average in the first quarter with shares gaining 13 percent. Can that momentum continue? We're looking at a chart here. I know you're familiar with it. What do you think is going to happen here?
BURNS: Well a lot of that positive news has been spurred by rising aluminum prices of course, but there has also been some merger speculations surrounding the company. There's nothing definitive out there, but I would not say that it's totally unforeseeable that one of these large mining conglomerates international, BHP Billiton a Rio Tinto or SBRG (ph) could look to add a sizable company like Alcoa to their portfolio so that they can truly be the supermarket for metal commodities to the world.
KANGAS: So Alcoa is not too big to be taken over, you think?
BURNS: No, I think a lot of your viewers will be surprised to see how large some of these international mining conglomerates are.
KANGAS: Now, excuse me, the company boosted its annual dividend in January. It launched a big stock buyback, about 10 percent of those outstanding. Do you think they'll continue to do things like this to support the shares?
BURNS: I think they will. The company's been very shareholder friendly when it comes to returning capital despite some of their inconsistent operating issues. You know, one thing definitely to take away from this quarterly results was how strong the free cash flow generation was, up $700 million from last year and a record cash flow generation. So this company, when they really set their mind to it, can really throw off a lot of cash.
KANGAS: Interesting. Do you own Alcoa shares or have any other disclosure to make Scott?
BURNS: I do not.
KANGAS: OK. I want to thank you very much for sharing your very interesting information with us.
BURNS: Thank you, you guys have a good one.
KANGAS: Thank you. My guest, Scott Burns, aluminum analyst at Morningstar.
