Alcoa Is Stuck in Neutral

Q3 earnings report shows few signs of forward momentum

By Tom Taulli, InvestorPlace Writer & IPO Playbook Editor

The S&P 500 has enjoyed a nice bull parade this year, but Alcoa‘s (NYSE:AA) float has been conspicuously absent, with shares up just about 2%.

And after a lackluster third-quarter earnings report, it could take even longer to get the aluminum titan rolling again.

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Alcoa on Tuesday reported a Q3 net loss of $143 million, or 13 cents a share, on revenues that were off by 9% at $5.83 billion.

The company did have to take a one-time writedown for $40 million to settle a lawsuit with Aluminum Bahrain regarding allegations of bribery. (The U.S. Justice Department and Securities and Exchange Commission are investigating whether the company violated the Foreign Corrupt Practices Act.) So backing out that and other expenses, the company generated profits of $32 million, or 3 cents a share, which did beat the Wall Street consensus for a breakeven quarter.

Needless to say, a technical victory rarely gets the crowd excited, and AA investors were no different, knocking shares down nearly 4% by midday.

The glaring fact remains that China continues to be a drag on Alcoa. Broadly speaking, the International Monetary Fund recently revised its 2012 growth forecast for China to 7.8% and 8.2%, down from prior estimates of 8% and 8.5%. It’s possible that China’s stimulus efforts — a $158 billion package focused at infrastructure buildup — might take hold, but that still might not be enough to counter the downward pressure from Europe.

As for Alcoa, it expects the global demand for aluminum to increase by 6% in 2012, which is down from a 7% forecast in the second quarter. And aluminum prices already are under pressure as inventories build up, plunging 17% from July to September.

Not that all’s gloomy for Alcoa. The company still is benefiting from strong demand across several sectors, including autos, aerospace and constructions. Plus, the rebound in the U.S. real estate market — that has sent homebuilders like KB Home (NYSE:KBH), Lennar (NYSE:LEN) and Ryland (NYSE:RYL) on a tear — could be a nice driver going forward.

As far as things Alcoa can actually control are concerned, a lean cost structure — which AA built through layoffs and other cost-cutting after the financial crisis — is helping Alcoa weather the storm.

Still, the main problem today is China, and the main problem tomorrow is China, too. And a solution is woefully in the air, as the world can only wait to see how the country’s economy deals with its myriad challenges. Combine that with the American wild card — namely, whether our economy will falter if we fail to deal with the fiscal cliff — and the global economy has the potential to be in a world of hurt, which ultimately would lead to even lower prices for aluminum.

Alcoa has some baseline demand, but the prospects for short-term growth look grim. Don’t use today’s dip as a buying opportunity — stay clear of AA stock for now.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.”  Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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