Thursday, October 8, 2009

BS From AA?: Q3 Earnings Season Highlights-

Alcoa was the first high profile name to report this Q3 Earnings season. If they are representative of what's coming from the other "big name announcements," then expect Q3 to be very much a repetition of Q2: Bad results portrayed as good ones based on beating low estimates, profits from unsustainable cost cutting outpacing badly declining revenues.

The Media Spin

Here's an excerpt from a typical article, by Daniel Lovering of AP.

source: [;_ylt=AurNNqSOXrpWrjIWZTIAE_m7YWsA;_ylu=X3oDMTE2ZG41bTh1BHBvcwMxMARzZWMDdG9wU3RvcmllcwRzbGsDYWxjb2FyZXR1cm5z/* ]

Painful cost-cutting and rising sales to automakers helped the nation's largest aluminum producer return to profitability for the first time in nine months.

Alcoa Inc. on Wednesday also forecast an 11 percent increase in worldwide aluminum demand in the second half of the year, fueled partly by robust growth in China. The lightweight metal is used in everything from airplanes to cars to houses.

Even though Alcoa reported a 71 percent drop in third-quarter profit from a year earlier, the results were a relief after three straight quarterly losses.

"We do clearly see growth, substantial growth ... in China," Alcoa CEO Klaus Kleinfeld told analysts and reporters after the company reported results. "(The) second half of the year is clearly better than the first half in many industries and many regions."

The Pittsburgh-based company said rising demand from several industries, especially automakers, lifted its revenue compared with the prior three months. Sales to automakers jumped 21 percent from the second quarter.

The Reality

With the cash for clunkers program over, is demand from automakers likely to be sustained?

When last Friday's jobs reports showed growing job losses, and those still working are working less and earning less

Looking at their financial statements, all I can see is evidence of unsustainable profits.

On the line "other expenses" in income statement, Alcoa adds 123m as income in 3Q09 vs. 15m as expense in 3Q08. Net $138m towards income in 3Q09. All net income 77m in 3Q09 come out from this unknown source and still short of 51m. Cost cutting: SGA was 234m in 3Q09 vs 275m in 3Q08, save 41m; R/D, 39m vs. 61m, save 22m; total 63m. That mysterious 123m other expenses-turned income was the major contributor to 3Q09. What is this? A negative cost as income reported among expense items suggest exactly that, a reversed expense, typically a one time event like a reimbursement or reversal of a contingency that never occurred.

From a YOY perspective:

q3 revenues (- 40%)

q3 eps (-90%)

q3 tonnage (-9%)

The Market's Conclusion?

How has the market valued AA?

share price October 8 2008 $14.71

share price October 7, 2009 $14.20 (after hours $14.99)

[see: for details from AA website]

As noted by blogger ZeroHedge: The comparison looks even more ridiculous when you add the facts that during that time period AA diluted shareholders by issuing 150 million shares of common stock at $5.25/share, $.28 above the 52 week low and $500 million of convertible bonds at the same time. In the last 12 months they've also cut the quarterly dividend from $.17 to $.03 per share

Conclusion: Beware Q3 Results – Look Beyond The Headlines

We Won't Get Fooled Again? We already have, regarding Alcoa.


Disclosure & Disclaimer: The author has no position in the above instruments. The views expressed are not necessarily those of AVAFX

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