ALCOA Inc. (AA)

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Alcoa shatters analysts’ lowest forecasts
By Hal Weitzman

Published: January 12 2009 23:55 | Last updated: January 12 2009 23:55

Alcoa, the US’s largest aluminium maker,demonstrated the depth of the difficulties facing global manufacturing and construction by reporting a $1.19bn loss in the fourth quarter, deeper than even the most bearish analysts had been expecting.

The company seemed blindsided by the pace of the decline in the price of aluminium, which has fallen more than 50 per cent in the past six months and by 35 per cent in the past three months alone. As a result, Alcoa’s revenue dropped to $5.7bn from $7bn.

The aluminium industry is caught up in a perfect storm of historic proportions,” said Klaus Kleinfeld, president and chief executive. “The price has never before fallen so fast. As demand disappears, inventories are building and prices are decreasing. In addition, inventory levels are affected by the tight credit markets.”

Unveiling the results after the markets closed in New York, Alcoa said it made a loss of $1.19bn, or $1.49 per share, in the quarter, compared with a profit of $632m, or 75 cents per share, in the same period in 2007.

Excluding extraordinary charges, Alcoa recorded a loss from continuing operations of 28 cents per share, a much worse result than Wall Street expectations of about 9 cents per share.

The company last week said it would cut 13,500 jobs, or 13 per cent of its workforce, fire 1,700 contract employees and impose a salary and hiring freeze. Alcoa also announced its third production cut in as many months, reducing smelting output by 750,000 tonnes a year, or 18 per cent of its annual output.

The company said it would cut capital spending by 50 per cent to $1.8bn, suspended its share repurchase programme and said it would look to sell four non-core businesses, valued at up to $100m.

It said it planned to sell its global foil division, its electrical systems business, its cast car wheels unit and its European transportation products division.

The cuts mean Alcoa is temporarily reducing output by the equivalent of 18 per cent of its total capacity. Nevertheless, some investors are concerned that the company has not cut output fast enough.

Addressing those concerns, Mr Kleinfeld said: “We are prepared to continue adjusting capacity to demand.”

He conceded that the industry might be oversupplying, but said: “There are contingencies – like the impact of a globally co-ordinated stimulus programme – that could begin shifting the balance. It is our intention to be prepared if and when that happens.”

Jorge Beristain, an analyst at Deutsche Bank, downgraded Alcoa’s shares from hold to sell on Monday before the earnings announcement and cut his price target to $8 from $10.

That prompted the company’s stock to fall 8 per cent to $9.93 on Monday.
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