Previewing Alcoa Earnings; Chances of a Buyout?

Tomorrow earnings season will be kicked off by the first DJIA reporting-component Alcoa (AA).  Investors often try to read too much into the metals sector AND into the markets based on Alcoa’s earnings, and this is odd if you think about how plagued the company has been.  Metals companies have actually been at-risk in the most recent weeks anyway, and Alcoa has a history of being fragmented out of a real metals sampling because of a perpetual underperformance.

Back in December, Jim Cramer said that Alcoa (AA) would be taken private this time next year since it never participated in the huge run seen in almost all other metals companies in the last two years.  As far as what the street think, well it’s $28.50-ish level is at the lower part of the $26.39 to $36.96 trading range seen over the last 52-weeks.

This will probably be the first financial update that shows progress in its 6,700 job layoff plans announced in November, and the company enjoyed what appears to eb about 4% higher aluminum prices in Q4 versus Q3.  There is of course the dollar-related risk at the company since it has so much overseas production, although businesses should be able to hedge this. 

Wall Street is expecting $0.65 EPS on sales of roughly $7.6 Billion.  Ahead of the earnings tomorrow, the street expectations for 2007 are for only a 2% rise in annual earnings to $2.93 EPS on revenues that are flat to down minimally to a level of $29.75 Billion.  At a rounded $28.50 price this gives the forward earnings a sub-10 P/E before restructuring and other incidental charges and an implied 0.83 times revenues.  These numbers are cheap to the market, but are deemed at risk and are actually in-line with many metals companies that have had earnings issues.  Now you just have determine if they are cheap to a potential buyer. 

It wouldn’t be cheap to acquire the company because even at the lower part of the range it has a $24.75 Billion market cap.  The company also carries roughly $21 Billion in liabilities, so acquiring an Alcoa (AA) wouldn’t be a low-dollar proposition at all.  US Steel (X) has also been subject of the rumor mill in recent months, although US Steel (X) market cap is only $8.4 Billion now and it also has a single-digit P/E ratio.

Alcoa gets a lot of attention because it is one of the first and because it is a DJIA component stock, but remember that it is deemed as an uncorrelated stock to the market.  When it comes to global buyouts, being defined as a "cheap" stock really depends on your context and what sort of valuation group you are talking to.

Jon C. Ogg
January 8, 2006