Alcoa Earnings: A Narrower Loss, but Sales Disappoint

The much-anticipated unofficial kickoff for first-quarter earnings season got underway as Aluminum giant Alcoa (AA) reported earnings that featured a narrower first-quarter loss after the closing bell on Monday. The results were helped by higher aluminum prices and steep charges for discontinued operations in the prior-year period. The Dow component managed to match Street estimates on the bottom line even though sales came up short of analysts' consensus.

With its products used in everything from aerospace to vinyl siding, Alcoa is seen as a bellwether for broader economic activity, making its earnings report likely to sway stocks on Tuesday. For the three months ended March 31, the Pittsburgh-based company reported a net loss of $201 million, or 20 cents a share, versus a wider net loss of $497 million, or 61 cents, in last year's first quarter.

However, Alcoa's loss from continuing operations came to 19 cents a share, and after excluding restructuring and other charges, the company would have posted earnings of 10 cents a share. That adjusted figure was in line with analysts' average forecast, according to data from Thomson Reuters. Sales rose 18% to $4.89 billion from $4.15 billion a year ago, helped by a recovery in aluminum prices, but analysts were targeting sales to hit $5.29 billion.

Where Are Aluminum Prices Heading?

"Our performance continued to improve in the first quarter thanks to higher realized prices and strong operational results," said Klaus Kleinfeld, Alcoa's CEO, in a press release. "Most of the special items we reported are non-cash and include proactive decisions to structurally improve the company's profit potential."

Of more concern now is where aluminum demand and prices are headed, analysts say. After topping out at $3,380 a ton in the summer of 2008, aluminum prices have tumbled, then recovered -- but they still stand about 30% below that peak and have been essentially unchanged for months.

"The price of aluminum started the quarter strong, but declined due to concerns over sovereign debt within the EU, and then strengthened at the end of the quarter on higher demand," says Desjardins Securities analyst John Redstone in a note to clients.

Deutsche Bank Cuts Its Rating to Hold

On Friday, analysts at JPMorgan (JPM) downgraded shares in Alcoa to neutral, from overweight, citing weak aluminum prices, among other concerns.

"Although Alcoa has taken significant costs out of its business by closing high-cost operations and through additional procurement and productivity savings, we think it will still struggle to generate attractive returns at our strategist's 2011 aluminum price forecast," wrote JPMorgan analyst Michael Gambardella.

Deutsche Bank (DB) cut its rating to hold from buy last week amid concern that Alcoa's bottom line would be hurt by a series of "one-off" costs. Now that Alcoa has met its bottom-line estimates but missed badly on sales, it's safe to say the first-quarter earnings season is off to a mixed start.