All's Not Well With Alcoa

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AlcoaQuestion: When is a 27% increase in sales, and a doubling of profits, bad news?

Answer:
(A) When Wall Street wanted to see profits rise even higher.
(B) When the profits are bunk.
(C) When it's Alcoa doing the reporting.
(D) All of the above.

If you circled (D), go to the head of the class. It's too early to say how investors will react to Alcoa's (AA) news today, or whether they'll take the news as an indication of how other metals makers such as U.S. Steel (X) and Nucor (NUE) will perform when they report later this month. (Alcoa shares did decline modestly in afterhours trading last night.) If you ask me, the news was not good.

Alcoa's headline issues
As we pick apart Alcoa's earnings, the first sign of trouble is in big, bold headline type: Alcoa misses earnings estimates. Wall Street analysts were looking for Alcoa to deliver $0.34 per share in second-quarter profits. The best Alcoa could dig up was $0.28 and a few pieces of pocket lint.

Sure, Alcoa beat on revenues. $6.6 billion in quarterly sales outpaced even the most optimistic analyst estimate, which had said the company might do $6.55 billion in business. Alcoa beat that number by a cool $50 million, and CEO Klaus Kleinfeld told investors to expect 12% demand growth this year, and 100% growth through 2020.

But that's good news, right? In Alcoa's case, not really.

The uptick in sales would be good news, if Alcoa showed any indication of being able to profit from the trend. It doesn't, and that's the problem.

Alcoa's profit problem
Sales may be going gangbusters -- up 24% in the first half. But so far this year, Alcoa has improved its cash from operations by less than 13%, while capital spending rose nearly 10%. The net result is that through the first half of this year, Alcoa managed to generate only $86 million worth of free cash flow. That's better than the $65 million Alcoa squeezed out in H1 2010 -- but a far cry from the $743 million in profits the company crowed about last night.

I wish I could tell you this was an aberration. I wish I could say "all's well at Alcoa." But the truth is that over the past five years, this company has burned through $2.3 billion in negative free cash flow ... all the while reporting $3.8 billion in net profit. Perhaps the saddest thing of all about yesterday's news is that it's not really news at all. It's just par for the course at Alcoa.

Motley Fool contributor Rich Smith does not own shares of, nor is he short, Alcoa. You can click here to see his holdings and a short bio.


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mmcdonald2k

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July 23 2011 at 12:15 AM Report abuse rate up rate down Reply
chris1011

Remember Jim Jones and the congregation he led from San Francisco to northern Guyana? Remember how he reacted to members of congress that came to investigate him? He murdered many. Then, all his followers drank the cyanide poison, most by obedience and some by force. It is a testimony to some 200 people's choice to embrace blind obedience, stupidity, and paranoia.

For years I have been claiming that the present Republican party is no longer Republican. It has been kidnapped by a group of extreme ideologues that uses the Republican name to fool people. Quite successfully.

Grover Norquist, a fundamentalist conservative, has had all Republican Congressmen, but 13, sign a pledge to never raise taxes or eliminate tax loop holes. Never, never, never. Thus, when it comes to taxes (and women's rights) those who sign the pledge have relinquished their independence, their intellectual abilities, and their loyalty to the constitution. Notice how often Republican congressmen vote unanimously on an issue. When two Republicans from Maine refuse, it becomes national news. They risk internal punishment from their party.

David Brooks, a conservative columnist for the NYTimes, wrote an article entitled, "the Mother of All No-Brainers,"on July 4. He concludes that the present group of uncompromising "Republican fanatics" are "not fit to govern."

Richard Cohen of the Washington Post wrote "the G.O.P......has become a political cult. The hallmark of a cult is to replace reason with feverish belief. It is the redoubt of certainty over reason, and in itself (is) significantly responsible for the government deficit that matters most: leadership."

These columns were written to illustrate why no compromise with President Obama is possible, regardless of the issue or the number of meetings.

I hate to think that we average citizens will allow this to continue. We can't wait for the next election to select independent thinkers. We must speak to our congressmen NOW, THIS WEEK. America needs her thinking, realistic citizens to reject these extremists. That is, while we still can.

July 13 2011 at 11:19 AM Report abuse rate up rate down Reply
Gumby

China has begun importing aluminium but it is exporting value added aluminium products... Either way, China will curtail copper consumption as it is switching to aluminium subsititutes to save costs.. All is not well with copper shortly!

July 13 2011 at 6:02 AM Report abuse rate up rate down Reply
toosmart4u

Nothing but greed for profits coming from wall street.

July 13 2011 at 4:26 AM Report abuse rate up rate down Reply
Gumby

It is kind of ironic to me that we are blaming our government about the economy. Lets take copper ... prices went up 500% in past decade or so because China had been importing copper to support booming construction there. Meanwhile, our construction withered because both high labor costs and high metal costs cannot co exist. Also, take molybdenum ... prices also went up much more than copper because China had also imported a lot of molybdenum to support its booming manufacturing economy. Meanwhile, our oil companies curtailed much of the horizontal drilling used to boost aging oil reserves . Drilling pipes are made of steel alloyed with molybdenum and we were using a lot of drill pipes because of the nature of horizontal drilling . Oil companies decided to move onward toward the Gulf of Mexico and we had a major oil spill there last year.. Now for aluminium, I can see clearly why America is so anxious to sell as much coal as possible to Chiina to help China keep its aging and inefficient smelting operations that uses too much electricity. The reasoning may be that America can not afford to pay higher aluminium prices if China decides to shut down a portion of its sprawling aluminium smelting operation capable of churning out 15 millon tons of new aluminium . America has only a couple millon tons of aluminium smetling plus another couple in Canada. So you should be able to see clearly how we are still all out to keep aluminium prices manipulated as low as possible without regard to the environment.. Moreover, aluminium will be in greater demand once we start expanding solar thermal generation in the near future, probably. We cannot just rely on photovoltaics solely for solar energy. We need to expand into solar thermal with advances in solar thermal engineering that is nearly ready to be commericialized.. The question I ask is whether we can afford to pay higher prices for aluminium as demand grows faster than supply in the near future. I dont think that we can do that until we start solar thermal generatoin commercially that should be more than pay for the higher aluminium prices themselves. As you should know that we are experiencing high unemployment , but we should also be aware that energy constraints still plays a huge role in most business decisions about hiriing workers. Oil companies can no longer be able to "power" our economy forward on their own. We will need to rely on other sources of energy whether it will be more coal, natural gas, photovoltaics, wind power, nuclear, hydropower and many others. I dont believe that we can afford to ignore recent promises in new advances ini solar thermal technologies , one of the advances by ALCOA offer great promise. We are also undergoing great reindustrializtion as more metals are being considered as candidates to be replaced with aluminium because of aluminium's great properties like lightweightness, affordability, sustainabilty, etc. Will ALCOA get there?

See full article from DailyFinance: http://srph.it/o4FxB9

July 12 2011 at 3:30 PM Report abuse -1 rate up rate down Reply
Gumby

It is kind of ironic to me that we are blaming our government about the economy. Lets take copper ... prices went up 500% in past decade or so because China had been importing copper to support booming construction there. Meanwhile, our construction withered because both high labor costs and high metal costs cannot co exist. Also, take molybdenum ... prices also went up much more than copper because China had also imported a lot of molybdenum to support its booming manufacturing economy. Meanwhile, our oil companies curtailed much of the horizontal drilling used to boost aging oil reserves . Drilling pipes are made of steel alloyed with molybdenum and we were using a lot of drill pipes because of the nature of horizontal drilling . Oil companies decided to move onward toward the Gulf of Mexico and we had a major oil spill there last year.. Now for aluminium, I can see clearly why America is so anxious to sell as much coal as possible to Chiina to help China keep its aging and inefficient smelting operations that uses too much electricity. The reasoning may be that America can not afford to pay higher aluminium prices if China decides to shut down a portion of its sprawling aluminium smelting operation capable of churning out 15 millon tons of new aluminium . America has only a couple millon tons of aluminium smetling plus another couple in Canada. So you should be able to see clearly how we are still all out to keep aluminium prices manipulated as low as possible without regard to the environment.. Moreover, aluminium will be in greater demand once we start expanding solar thermal generation in the near future, probably. We cannot just rely on photovoltaics solely for solar energy. We need to expand into solar thermal with advances in solar thermal engineering that is nearly ready to be commericialized.. The question I ask is whether we can afford to pay higher prices for aluminium as demand grows faster than supply in the near future. I dont think that we can do that until we start solar thermal generatoin commercially that should be more than pay for the higher aluminium prices themselves. As you should know that we are experiencing high unemployment , but we should also be aware that energy constraints still plays a huge role in most business decisions about hiriing workers. Oil companies can no longer be able to "power" our economy forward on their own. We will need to rely on other sources of energy whether it will be more coal, natural gas, photovoltaics, wind power, nuclear, hydropower and many others. I dont believe that we can afford to ignore recent promises in new advances ini solar thermal technologies , one of the advances by ALCOA offer great promise. We are also undergoing great reindustrializtion as more metals are being considered as candidates to be replaced with aluminium because of aluminium's great properties like lightweightness, affordability, sustainabilty, etc. Will ALCOA get there?

July 12 2011 at 3:24 PM Report abuse -1 rate up rate down Reply
Gumby

Rich, you are somewhat right about Alcoa as a so - so... but you know that aluminium prices is entirely responsible for that.. I mean , does anyone really want to see aluminium prices go up or "catch up" with the rest of the metal pack? This is the key to ALCOA stock performance... There is almost nothing wrong going with the managment. It is the old mindset that we are entitled to underpriced metals which is no longer true.. ALCOA can do nothing but keeping the hold out until brighter days FINALLY ARRIVES! whew!

July 12 2011 at 2:49 PM Report abuse +1 rate up rate down Reply
Dale Munger

Wow, a bunch of negative psycho babble. Maybe if there was a little less interest in short term stock prices and more interest in preserving the middle class and paying workers a decent wage we would all be a lot better off....

July 12 2011 at 2:43 PM Report abuse +1 rate up rate down Reply
1 reply to Dale Munger's comment
Gumby

Dale, you ought to be aware that many investors still has vested interests in seeing oil prices going ever higher and higher because they own stocks and bonds in fossil fuel companies.. ALCOA can help stop that with its advanced solar thermal technology that is yet to be commercialized. We are counting on photovoltaics heavily as our solar energy approach but solar thermal can overtake photovoltaics because of far higher efficiencies and lower costs per watt or BTU. If we go ahead with solar thermal technology, it can mean increased demand of aluminium and higher aluminium prices.. It can also mean depressed oil prices due to falling oil demand as a result of solar themrmal growth.. Oil and gas investors are not interested in seeing that happening.. So with oil prices appearing certain to keep climbing higher and higher , we can certainly see much longer unemployment situation for years and years to come. If we want to solve unemployment, we have to understand what aluminium can do for our economy as too many people still misunderstand aluminium as something we can do without .. Quite to the contrary, aluminium is very vital to our economy and we still need far more aluminium !

July 12 2011 at 3:36 PM Report abuse rate up rate down Reply