ALCOA PERFORMING WELL, BUT OUTLOOK STILL BLEAK UNLESS ALUMINUM PRICES RISE

Alcoa Inc. has executed an impressive operational turnaround, say analysts. In its just-released third-quarter results, it reported underlying earnings of US$120-million, an impressive 58% year-overyear gain despite flat revenue. The company also achieved major productivity gains, notably in its primary metals unit.

So are analysts ready to place buy ratings on this longsuffering stock? No. Many of them remain bearish on aluminum prices, which need to turn around to create any excitement about Alcoa.

“Alcoa again did well to hold its own in a difficult market, but we believe the upside for the shares depends on higher aluminum prices and we remain pessimistic on the prospects for an improvement any time soon,” RBC Capital Markets analyst Fraser Phillips said in a note.

Alcoa is forecasting a deficit in the aluminum market of 400,000 tonnes this year, but Mr. Phillips is not so optimistic. He expects an essentially balanced market. And analyst Jorge Beristain of Deutsche Bank AG said his team anticipates a surplus of 450,000 tonnes, totally at odds with Alcoa’s rosy view.

BMO Capital Markets analyst Tony Robson noted Alcoa is now generating most of its after-tax operating income (ATOI) from its value-added downstream divisions, which are not so sensitive to aluminum prices. He calculated that roughly 80% of ATOI in the third quarter came from downstream segments.

“At such low metal prices, [Alcoa] has become predominantly a fabrication company,” he said in a note.

All three analysts rate the stock as sell or underperform.