Wednesday, January 9, 2008

Alcoa Net Tops Estimates on Gain From Sale of Unit (Update1)

By Dale Crofts

Jan. 9 (Bloomberg) -- Alcoa Inc., the world's third-largest aluminum company, said fourth-quarter profit rose 76 percent as a $323 million gain from the sale of a unit more than offset lower metal prices. The shares rose the most since October.

Net income rose to $632 million, or 75 cents a share, from $359 million, or 41 cents, a year earlier, New York-based Alcoa said today in a statement. Excluding some items, profit fell to 36 cents. The company was expected to earn 34 cents, based on the average of 13 estimates in a Bloomberg survey.

Alcoa, seeking to regain investor confidence after its failed $27.7 billion takeover bid for Alcan Inc., is buying back stock and selling less profitable units to boost a share price that had tumbled 32 percent since July 12. Sales declined 5.8 percent to $7.39 billion as aluminum prices fell.

``The metal price was weaker in the quarter and Alcoa got hit,'' said Charles Bradford a metals and mining analyst at Soleil Securities in New York. ``The one big positive was they bought back a lot of shares. The initial reaction was positive, but I think people are going to be cutting their estimates.''

Alcoa rose $1.45, or 4.6 percent, to $32.70 at 5:15 p.m. in New York. A close at that price would be the biggest gain since Sept. 18. Before the results were announced, the shares had dropped 17 percent in the past month.

Metals Profit Falls

Profit in the primary metals business fell 59 percent to $196 million from $480 million a year earlier because of lower prices and higher costs, Alcoa said. The company also reported a $16 million loss in flat-rolled products, compared with a $62 million profit a year earlier.

``Aluminum prices are less buoyant and costs are rising, squeezing Alcoa's profit margins,'' Leo Larkin, a metals and mining analyst at Standard & Poor's in New York, said before the results were released. ``Selling the underperforming businesses is a positive, but I'm surprised the company isn't having more success controlling costs.''

Alcoa agreed last month to sell its packaging unit to New Zealand billionaire Graeme Hart for $2.7 billion and plans to spend $6.9 billion to buy back about 25 percent of its stock. A tax benefit related to the transaction helped boost per-share earnings in the quarter by 38 cents, the company said.

The company, led by Chief Executive Officer Alain Belda, has struggled to pass on higher costs for raw materials and energy.

``You can't ignore the macro headwinds Alcoa is facing,'' Scott Burns, a metals and mining analyst at MorningStar Inc. in Chicago, said before the results. ``Lower aluminum prices, a weaker dollar and a slowing U.S. economy are all going against them.''

Lower Prices

Alcoa said it sold aluminum on average at $2,646 a metric ton during the quarter, down 4.3 percent from $2,766 a year earlier, as U.S. demand slowed for the metal in autos and new- home construction.

The metal is sold mostly in dollars, so the U.S. currency's decline against the Australian dollar or Brazilian real hurts earnings by increasing costs for the company in those countries. Costs also have risen for the energy used to power aluminum smelters and for raw materials such as resins.

``We see no major catalyst other than share repurchases to drive the stock higher in the near term,'' analysts including Lloyd O'Carroll at Davenport & Company LLC in Richmond, Virginia, wrote in a Jan. 3 note to investors. They have a ``buy'' rating on Alcoa.

Alcoa is the first company in the Dow Jones Industrial Average to report third-quarter earnings.

Aluminum Consolidation

Alcoa slipped from its position as the world's largest aluminum producer last year after a merger that led to the creation of Russian aluminum producer United Co. Rusal. That combination was eclipsed in size by the takeover of Alcan by Rio Tinto Group Plc. As an alternative, Alcoa is seeking joint ventures in China, the Middle East and North America to boost smelting capacity, Belda has said.

The company hired former Siemens AG Chief Executive Officer Klaus Kleinfeld as chief operating officer effective Oct. 1 and said it expects him to become chief executive officer and chairman when Belda retires. Belda, who hasn't set a formal date for his retirement, is blamed by some investors for not boosting the stock enough during a five-year rally in commodities.

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