Alcoa's Profit Surprise Bodes Well for Economy, Stock Markets

BOSTON, July 13 -- Alcoa Inc., the largest U.S. aluminum producer, reported second-quarter sales and profit that beat analysts' estimates and forecast higher global demand for the metal, which may signal broader economic growth.

Alcoa gained in after-hours trading in New York yesterday after it said rising sales of aluminum for packaging and commercial transportation helped it report per-share earnings of 13 cents, exceeding the 11-cent average estimate of 17 analysts surveyed by Bloomberg. Global aluminum consumption will gain 12 percent this year, compared with the company's previous forecast of 10 percent, Alcoa said.

"It's a very positive signal for economic growth and the stock market generally," John Stephenson, who helps manage C$1.65 billion ($1.6 billion) including Alcoa shares at First Asset Investment Management in Toronto, said in an interview. "Maybe end-use demand has not been destroyed. That's a very good sign and a great way to start off this Q2 earnings season."

Alcoa, the first company in the Dow Jones Industrial Average to report earnings for the three months through June, rose 33 cents, or 3 percent, to $11.20 at 7:37 p.m. yesterday after the close of regular trading on the New York Stock Exchange. The shares fell 33 percent this year through yesterday's close, the largest decline in the 30-member Dow.

Alcoa sees aluminum sales for automotive uses increasing 3 percent to 8 percent this year, while sales for commercial trucks and trailers may gain 12 percent to 17 percent, Chief Executive Officer Klaus Kleinfeld said on a conference call yesterday.

"Faster Demand Growth"

"Alcoa is now saying they are seeing faster demand growth and this is good," Charles Bradford, a partner at New York- based consulting firm Affiliated Research Group LLC, said in a telephone interview. "I would have liked to see them post an even better number, but the industry is still very depressed."

Alcoa reported second-quarter net income of $136 million, or 13 cents a share, compared with a net loss of $454 million, or 47 cents, a year earlier. Sales gained 22 percent to $5.19 billion, exceeding the average estimate of $5.02 billion from eight analysts in the Bloomberg survey.

Alcoa still has a long way to go to get back to earnings levels before the 2008 financial crisis. In the 18 months through June 2008, before commodity and stock markets tumbled amid the global economic recession, Alcoa's profit excluding one-time items averaged 62 cents a share.

The company is on the road back and sees indications of a recovery in almost all markets this year, Kleinfeld said on the call.

'Right Direction'

"We are really working very hard to fire on all cylinders," Kleinfeld said. "Undoubtedly we are not seeing the environment we've seen in the past but we see the environment getting better and continuously moving in the right direction."

Alcoa generated more than half its revenue in the U.S. last year. The country's economy will have average growth of 2.8 percent from the current quarter through the second quarter of 2011, according to the median estimate of 52 economists surveyed by Bloomberg from July 1 to July 8, down 0.1 percentage point from last month.

A decline in aluminum prices since the end of the second quarter is still a source of concern for the third quarter, Bradford said.

Aluminum for delivery in three months increased 39 percent, on average, in the second quarter from a year earlier on the London Metal Exchange. The price was still down 15 percent since March 31 and more than 40 percent from the July 2008 high, before the global economic recession cut demand.

After prices fell and global inventories rose, Kleinfeld idled 20 percent of Alcoa's aluminum-smelting capacity. The company has lowered procurement costs by $1.4 billion so far this year, and eliminated another $311 million of overhead costs, Kleinfeld said on the call.

"They have to focus on what they can do something about," Affiliated Research's Bradford said. "They can't make airlines buy more planes."