Monday, 12 July 2010

Alcoa Earnings 12th July 2010 - AMC

Alcoa Q2 2010 Earnings Release - 12th June 2010

All estimates since last quarter have been revised downward
Price of Aluminum very low over the last quarter

Market Cap is $11,170m

Current Asset - $6,619m. Total Liabilities $21,985. Net deficit $15,366.

Operating Cash flow $200m for the prior quarter Q1 2010 Prior year $1,379 - 2010.

A valuation of $11bn feels high. Historic results are probably not much to go by as we experience an exceptionally high global boom through considerable overspending.

A loss has been made in last 6 quarters except 1.

Large pension scheme deficit

Earnings estimates around $5,050m and 12c a share.

Prior quarter a loss of 19c a share.

Sales growth in the last 2 quarters, compared to same quarter of the prior year of 16% and 17% respectively. Taking prior year June 2009 quarter this would put revenue to $4,960m for the current quarter if this growth continues.

Aluminum prices have seen downward trend over the last 3 months.

USA accounts for 50% of the 2009 sales. The total sales to countries which have or will have some for of austerity measures is around 12%. This could prove detrimental for guidance.

Although China and India are growing the sales to these regions are not substantial. Construction in USA has not picked up and we will not see levels of activity achieved in 2007/2008.

There could be increases to supply in Germany and France due to increases in Car sales though this is unlikely to offset the downward aluminum prices together with the potential lower expenditure as a result of the austerity measures.

In December 2009 Alcoa had revenues of $5,433m yet obtained loss of 19c on these revenues. For March 2010 there was an improvement - revenues of $4,887m but on these revenues returned 2c underlying. So how $5,000m of revenue is going to be achieved with 12c a share as any ones guess. The option buyers though look like they are in the know.

Overall it would appear that both revenue and earnings are unlikely to be beat.

However looking at the current open interest, there is a significant number of calls to puts.

Currently (12th July 2010) there is 229,547 out of the money calls. That is for 229m shares at $10 a share would be $2,290m of value. With a market cap of only $11,170 this is a significant number of call options.

However the call options could have been placed as a result of getting buyers in with a view to close prior to results or alternatively to cover heavy short positions.

Shares as % of float have slightly increased since the last quarter but the shorts are not significant.

Recommendation :

No trade. I would like to short on fundamentals this but I believe the call options buyers are in the know !

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I try and work a broadly market neutral strategy and based purely on fundamentals and my gut feel.