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Alcoa Kicks Off Earnings Season With Miss


Slowdown in U.S., Europe negates strong demand abroad.


Earnings season is off to an ominous start.

Alcoa Inc (AA) announced first quarter results yesterday after the bell, indicating less-than stellar profits amid higher energy and environmental costs and a weak dollar. According to Bloomberg:

  • First quarter net income fell 54% from last year.
  • Total sales fell 6.7% to $7.4 billion.
  • Net income dropped to $303 million, or $0.37 per share, compared to $662 million or $0.75 per share last year.
  • Excluding certain items, profit was $0.44 per share, below analyst estimates of $0.50 per share.

Despite the recent uptick in commodity prices, Alcoa sold aluminum for 3.5% less than it did a year ago. Slowdowns in both the U.S. and Europe hurt sales, but strong demand for the metal from developing countries helped support the top line. Stiff competition, industry consolidation and high input prices squeezed margins. Russia's Rusal and Rio Tinto Alcan (RTP) now both sell more aluminum than the former top producer.

Alcoa sells most of its aluminum in dollars and said the weak greenback reduced earnings by eight cents per share. When the company purchases materials and pays workers in foreign currencies, those input costs rise as the U.S. currency falls.

Alcoa's earnings miss is particularly disturbing, as it shows a slowdown in Europe and the U.S. can still negate gains in developing countries. In time, emerging economies like China, India, Russia and Brazil will compensate for the lost demand, but for right now profits are still closely tied to the developed world.

Results from the world's third largest producer of aluminum mark the unofficial start to earnings season. Wall Street is hoping an economic recovery in the second half of the year will help erase the memory of the last nine dismal months. But as long as the credit outlook remains unresolved and jittery investors focus on near-term earnings forecasts, disappointments will continue to pressure stocks.

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