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Alcoa investors bracing for earnings hit

7/07/2008 - 20:22
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ALCOA 10,4000 +1,96%

NEW YORK (Reuters) - Investors in Alcoa Inc are expecting a rough quarterly earnings report on Tuesday from the aluminum maker, whose profits are expected to sink nearly 20 percent as escalating energy and other costs take their toll.

Aluminum prices should prove to be a bright spot, although the market will be closely eyeing ALCOA (AA.NY)s margins to see how much of the increased costs for energy and materials, such as caustic soda, the company has managed to pass along to its customers.

"I think that this quarter's going to be pretty mundane. The trends that were in place in the first quarter are going to still be there," said Charlie Smith, chief investment officer at Fort Pitt Capital Group, which owns about $10 million of Alcoa shares.

Analysts are expecting Alcoa's income from continuing operations to slide to 66 cents per share from 81 cents a year earlier, according to Reuters Estimates.

That forecast is also about 8 percent lower than the 72 cents per share analysts had predicted in mid-June.

Alcoa had said on June 10 that an explosion at a gas supply plant in Australia would trim its second-quarter earnings by 2 to 3 cents per share.

Surging energy costs, a weak U.S. dollar and worries about the health of Alcoa's major customers will be in focus as the market digests the first earnings report of the quarter from a component of the Dow Jones industrial average.

"The bigger worry for me is really the trends in the auto industry and the aerospace industry given that two major end-markets for aluminum are really under assault right now," said Scott Burns, analyst at Morningstar.

"Even though airlines need to switch to more fuel efficient airplanes, they simply won't be able to if they don't have any money. The woes in the automotive sector are pretty clear .... So I do think in the short-term for Alcoa it's going to be tough," he added.

Alcoa shares have slumped 26 percent from their recent high in mid-May to around $33 on Monday, bringing their year-to-date decline to nearly 10 percent. Still, that drop is not as severe as the nearly 16-percent drop in the Dow Jones industrial average <.DJI> over the same period.

Alcoa rose 5 cents, or 0.15 percent, to $32.83 on the New York Stock Exchange late Monday afternoon.

(Reporting by Matt Daily and Euan Rocha, editing by Richard Chang)

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