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    Alcoa plunges on Revenue Miss; Pricing Momentum could Trigger Upturn

    Alcoa Inc. (NYSE: AA) shares dropped more than 4% after the aluminum producer posted first-quarter revenue that felt short of market expectations. The revenue miss contrasts the double-digit growth in demand and strong aluminum prices during the first quarter of 2011, but is a logical consequence of a bunch of upward revisions in 2011 result estimates that analysts carried over the last months.

    The company’s revenue increased 22% to $5.96 billion in first quarter 2011 from $4.89 billion a year earlier. The result missed the $6.07 billion average analyst estimate, based on data provided by  Thompson Reuters. Alcoa profited from higher aluminum prices and stronger sales across most of its customer base, including aerospace, packaging, construction and commercial transportation. However, results were affected by a weaker dollar.

    The company delivered strong profitability in first quarter 2011, benefiting from extensive cost saving efforts in the previous quarters. First-quarter net income reached $308 million or $0.27 a share, compared to net income in fourth quarter 2010 of $258 million or $0.24 per share and a net loss in first quarter 2010 of $201 million or $0.20 per share. Excluding one-time items, earnings were $0.28 a share, topping slightly the $0.27 average estimate of analysts.

    Alcoa’s outlook for the remaining of 2011 and beyond remains very positive. The company expects global aluminum demand to grow by 12% this year with some sectors growing even more. Last March, the company restarted production at its East Plant in Massena, NY, to honor the growing demand. Alcoa plans to increase alumina output to 4.1 million – 4.2 million tones range in second quarter 2011, while higher pricing should further enhance its profits.

    The burgeoning economic growth in BRIC countries, as well as resuming growth in the U.S. and E.U., would likely keep aluminum demand and prices rising in 2011. According to Alcoa, demand for aluminum could double over the next 10 years, driven by demand from Asia, Brazil and the Middle East.  Moreover, HSBC Holdings forecast that aluminum demand could exceed output already in 2012, creating the world’s first global shortage of aluminum since 2004. The shortage threat is still to be considered , since the political instability in the Middle East endangers approximately 10% of global aluminum output.

    The price of aluminum has soared more than 30% in the past year to top $2,600 per ton by the end of first quarter 2011, from around $1,990 per ton during first quarter 2010. Aluminum climbed to $2,720 during the intraday trading of April 11, the highest since 2008. Alcoa reported that its average realized price for aluminum rose 15% in first quarter 2011 to $2,682 per ton from first quarter 2010.

    The growing aluminum prices as well as recovering demand in 2010 and 2011 has boosted Alcoa’s stock price by more than 65% since September 1, 2010. The stock gained nearly 10% in the second part of March 2011, as Japanese rebuilding efforts are expected to bolster the overall demand.

    On the opposite pole, the company expects to report higher input costs of fuel oil due to turmoil in Libya and Middle East, as well as higher cost of caustic soda, a material used in the processing of alumina, following the natural disaster in Japan. The prices of oil increased on average by 20% in first quarter 2011 versus first quarter 2010. Despite these higher costs, the cost cutting programs provided Alcoa with a decent margin to remain competitive and generate improving profitability even with the higher cost of materials.

    Analysts polled by Thompson Reuters, expect Alcoa to report earnings of $0.35 per share on revenue of $6.3 billion in second quarter 2011.  For entire 2011, the company is expected to earn $1.35 a share on $24.2 billion in revenue. The market implies the company would post a growth of 21% for second quarter 2011 and 15% for entire 2011.

    With favorable aluminum pricing momentum and expansion of production capacities with the re-opening of smelter in Massena, Alcoa is well position to top the market in upcoming quarters. Moreover, the latest reports are indicating that the global economy has finally locked on to a recovery path.

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