Monday, January 12, 2009

Alcoa (NYSE:AA) : Downgraded to Sell ahead of earnings release

Deutsche is out with a gutsy call on Alcoa (NYSE:AA) downgrading the stock to Sell from Hold while lowering tgt to $8 from $10.

Firm is revising their earnings model for DB’s revised commodity estimates and the recently announced production cuts (among other measures) to weather the economic downturn. They believe these factors will likely lead to significant net losses for Alcoa in the short term and note the downside from current prices, near-term negative FCF and large net debt position support their Sell rating.

As a result of DB’s lower aluminum price forecasts (USc63/lb for 2009, -26% vs. prior, and USc70/lb for 2010, -32%). and recently announced volume cuts, they have slashed Alcoa EPS estimates to a US$0.85 net loss for 2009 (vs. prior earnings of US$0.04) and US$0.27 loss for 2010 (vs. previous US$1.00 gain), below Bloomberg consensus of US$0.35 and US$1.05, respectively. On January 6, Alcoa announced additional curtailment in smelting output of 135,000 mtons and that it will cut its workforce by 13,500 (13%) by the end of 1Q09. Capex for 2009 should be reduced to US$1.8bn (50% lower YoY).

Diluted EPS loss of US$0.93 for 4Q08
Based on a sharp sequential drop in aluminum prices, the firm expects Alcoa to report 4Q08 diluted EPS loss of US$0.93, lower than Bloomberg consensus of US$0.08 loss, and vs 3Q08 earnings of US$0.33/share. After excluding the after-tax impact of ~US$900m (~US$1.15/share) due to one-off charges (restructuring, impairment and special charges), normalized diluted EPS stands at US$0.17.

Notablecalls: AA is set to release its quarterly tonight, making DB call a gutsy one. If they are right, Alcoa won't be able to sustain its current dividend.

Not saying short into $10.30 in pre mkt but one to keep on the short radar.

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