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Stock Analyst Update

Weaker Fabricated Aluminum Demand, High Inventories Make a Bad Combo for Alcan

Aluminum maker still a wait-and-see for investors.

What Happened?
Alcan Aluminum  said Monday morning that it fell just short of Wall Street consensus estimates for the third quarter when adjusted for nonrecurring costs related to write-offs, tax benefits, and startup expenses. The Montreal-based aluminum producer delivered earnings per share of $0.69, a 25% increase from a year earlier, but missed the Zacks consensus forecast of $0.70.

What It Means for Investors
We would hold off on this stock until Alcan's fundamentals strengthen and the company proves it can gain sought-after benefits from the Algroup acquisition.

The company delivered a mixed bag for investors. While Alcan sold its commodity products for an average of 10% more than the same quarter a year ago, this benefit was offset by weaker demand for fabricated aluminum products, which generally command higher profit margins. This cloud of concern had some silver lining: The European fabricated business showed some strength. We believe this is a positive signal considering that the company soon will acquire Switzerland's Alusuisse-Lonza Group (Algroup). In addition, we welcome the news that Alcan in the third quarter repurchased 6.9 million shares--roughly 3% of the outstanding stock--in an effort to boost its share price.

On the negative side, higher raw material costs cut into profits, and this could pose a challenge for some time. Further, the company suggested that overall aluminum demand could slow through year-end, and Alcan's inventories are high.