Alcoa, Making Bad News Sound Good (AA)

Alcoa Inc. (NYSE: AA) kicked off earnings season this evening on news that is all in all not that exciting even if the reception is one of approval.  The company said that it finished its fourth quarter 2009 as being free cash flow positive for the first time since Q2-2008 and announced that it is ahead of its key financial goals for 2009.  The issue to consider here is whether you can keep chasing a stock when its stock has run so much and when the company did not meet Wall Street expectations.  The loss was -$0.27 EPS, but that would be $0.01 EPS if you back items out.  The company’s revenue was $5.43 billion, down from $5.7 billion a year earlier.  Thomson Reuters had estimates of $0.06 EPS on $4.82 billion in revenues.   We had heard whisper numbers of $0.10 or higher on earnings based on the recent stock strength.

Alcoa generated free cash flow of $761 million in the last quarter and beat its internal targets for its cash sustainability program initiatives in 2009.  As far as addressing 2009, Alcoa noted a price crash, demand destruction, and a credit crunch all impacting its industry. The good news here is that this revenue jump is 18% sequentially and the company noted that all markets but aerospace, commercial building and construction, and industrial gas turbines improved from the previous quarter.

The company claims to have cut its overhead by $412 million, which it said is more than double its expectations. It further noted that procurement spending was cut by $2 billion in 2009, about $500 million above its own target.  Reductions in working capital generated more than $1.3 billion in cash or more than $500 million above the 2009 target of $800 million.

Alcoa ended its last quarter with about $1.5 billion in cash on hand; another positive is that cash from operations was $1.1 billion in the quarter compared with $184 million the quarter before and compared with $608 million in the same period of 2008.  Its debt-to-capital ratio was 38.6%, a gain of 390 basis point from the same period a year ago. Alcoa cut its total debt by $759 million from the end of 2008 over the course of this last year.  Cap-ex was down more than 50% in 2009.

To highlight just how far off the company was in its 2009 to 2008 comparisons is that revenues in 2009 were $18.4 billion versus $26.9 billion in 2008.  The issue we have here is on more than one front.  The 52-week low is $4.97 and we won’t bother harping on the notion that shares hit a 52-week high of $17.60 before a close of $17.45 today.  The old 52-week low is from the worst stock market selling climax many investors have seen in their careers.  But there is the notion that this was at $10.00 at the end of last summer, and shares are now up another 74.5% since then.

The stock acted as though it was petering out around $15.00 in December, yet that did not occur.  Shares were halted after the closing bell before the news broke and the stock is now down 6% at $16.40 in the after-hours session.  It will be interesting to see if profit takers dominate on Tuesday or if the investment community just keeps buying up all the stocks on weakness merely because the opportunities to get in have been limited.

Common sense would dictate that profit takers would win, but the market has so far been very cruel to anyone fighting the “buy on every bit of weakness you can find” notion.  We’ll see how this opens on Tuesday before making any extreme calls.  What is obvious here is that investors are trying to look farther and farther out to when the less-bad news is really actually good news.  The question is how many times stocks can run up and up on news that takes these stocks to higher and higher valuations.

JON C. OGG