NEW YORK: Aluminum producer Alcoa Inc beat Wall Street estimates with its first-quarter profit, but the recent run-up in its shares and in the price of the metal may have raised investor expectations too much, prompting a sell-off, some analysts say.
Others on Wall Street are encouraged by Alcoa's positive outlook for global aluminum demand growth, and they forecast a share price rise in lock-step with the metal's resurgence.
Alcoa shares had risen nearly 40 percent in the six months leading up to Monday's earnings report, while the aluminum price gained about 15 percent. But the shares slumped more than 6 percent to $16.66 on Tuesday after Alcoa's first-quarter revenue missed analysts' targets and the aluminum price slipped 1.3 percent to $2,654 per tonne in London.
SELL
Cost pressures are likely to persist even as end-market demand for aluminum slowly improves, said analyst David Lipschitz of CLSA Asia-Pacific Markets.
He raised his 2011 earnings estimate, reiterated his target for 2012 and raised his share price target to $15.50 from $13. But he maintained the "sell" recommendation on Alcoa stock that he has had in place since June 2009.
"With the recent strength in Alcoa's share price, we believe that investor expectations were for higher earnings," Lipschitz wrote in a research note. The quarter also benefited from a lower-than-expected effective tax rate, he noted.
BUY
The aluminum supply/demand outlook continues to look positive, which should boost aluminum prices, which is good for Alcoa, according to Anthony Rizzuto of Dahlman Rose & Co.
"Management remains constructive on the prospects for aluminum supply/demand, supported by strong growth trends in key end markets," he wrote.
"They believe that Chinese supply pressures ... are likely to curb capacity build in primary aluminum. Elevated marginal cost of production and tight scrap and physical primary aluminum market conditions should continue to support near-term prices despite relatively high inventories."
Rizzuto increased his full-year 2011 earnings estimate, maintained his $22 share price target and reaffirmed his "buy" rating.
He said Alcoa benefits from increasing aluminum prices, a shift toward spot and index-based contracts for alumina -- the metal's raw material -- and sales and operational improvements in its downstream businesses.
"However, some of these benefits will likely be offset by rising raw material costs and adverse currency movements," Rizzuto wrote in a research note.
John Redstone, an analyst with Desjardins Securities, also maintained a "buy" recommendation for Alcoa and a share price target of $28.10.
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