HardAssetsInvestor

Written by Julian Murdoch  |

October 09, 2008

Alcoa’s Bloodbath

Details

It's earnings season, folks - not a time for those faint of heart.

• A devil's brew of troubles
• Demand (or lack thereof?)
• The spin doctors

 

 

With everything that's been going on in the market lately, what's a little more bad news?

After the market closed on Tuesday, Alcoa started the third-quarter earnings reporting season with a bang. Unfortunately, it was not the fun party kind, but the giant gaping crater kind.

Analysts (Bloomberg survey) had estimated that Alcoa would post earnings around 51 cents per share. The reality turned out to be 37 cents per share. Needless to say, Alcoa's stock price took a beating, hitting a low of $13.40 on Wednesday before closing at a 52-week low of $14.71 - down nearly 12% on the day, and off an ungodly amount from its midsummer high of $45/share.

 

 

The problem, according to Alcoa, is a devil's brew of falling aluminum prices, falling demand and tight margins. Let's take those one by one.

 

Aluminum Prices

Commodity investors are accustomed to roller coaster rides, but aluminum has been a true E-ticket ride.

 

YTD LME Aluminum Alloy Cash Buyer

 

In the beginning of the year, it looked like aluminum could do no wrong. The first quarter saw record increases with LME aluminum rising over $700 per tonne. Prices fluctuated around the $3,000/tonne level until the great downward slide (let's not call it a crash) of this summer. Current prices aren't far off where they started the year, but that's not much comfort if you're Alcoa - or an Alcoa shareholder.

 

Demand (Or The Lack Thereof)

Forty-eight percent of aluminum is used in construction and transportation - things that require day-to-day confidence from buyers in both the retail and industrial sector. Neither industry is looking good right now. Boeing is still in the middle of a strike, and the longer it goes on, the more likely production (and therefore aluminum consumption) will fall. Already, analysts are beginning to revise down their estimates for airplane delivery.

Things are even worse on the ground. Auto sales in North America are down, as are orders for trucks. Alcoa put the numbers down 14% and 13%, respectively, during the earnings call. Things are even worse in Europe, with Alcoa stating that the European auto market is down 20%.

Even the Japanese aren't immune. MarketWatch reported that a Japanese media source says Toyota [NYSE:TM] is expecting consolidated operating profit to be 40% less than expected for its fiscal year that ended in March. Also in the report was the concern that Toyota might miss its 2008 sales targets. Needless to say, its share price took a hit - down 11.6% on the Nikkei. It's worth pointing out that this isn't hard news, just aggressive speculation, but it makes sense.

If there is any good news on the demand front, it's that China is still experiencing growth, although it is expected to slow to 15% rather than a previously expected 22%. But at this point, the fact that we're talking about slowing growth as opposed to outright decline has to be seen as a positive in what is otherwise a dismal, dismal base metals environment.