From Denninger: An interesting, mostly-positive earnings report - with a few unexplained quirks…..

“Let’s dig in a bit and see what we got (the aftermarket loved it!)

Strong points include the fact that the bottom line was a beat; top-line questionable - everyone is claiming “beat” but I had the same number on my screen as they reported, so take your pick - if it’s a beat, it’s not a big one (and might not be one at all.)

Cost-cutting and improved prices for aluminum products are the story here. Here’s the top-line reality: Revenues were $4.6 billion .vs. $4.2, up 9.52% sequentially. Good, right?

Weeeeeellll… aluminum prices went from $1,667 per ton to $1,972, an 18.3% increase.

Now we got a wee problem. This rather strongly implies that the actual shipped volume was down sequentially. Does it prove this? No, as we don’t have product mix shifts in the report, but this sure as hell suggests a decrease in shipped tonnage sequentially, not just year/over/year, and is a big fat flashing yellow light that I bet you don’t see talked about.

What makes no sense here is this statement in the release:

Due to low inventories at distributors and rising shipments, regional premiums are improving and global aluminum consumption is expected to increase 11 percent in the second half of 2009.

I don’t believe it, to be blunt. You don’t have a 9% increase in gross sales on an 18% increase in prices and tell me that shipments are rising, unless you’re somehow magically making product appear at customers for which you’re not being paid. The internals of the report and the breakdown don’t help me come up with a reconciliation either.

Something doesn’t add up.

Oh wait! Here it is! Right at the bottom of the report (missed it first pass; thanks to the guy who emailed me!): 1,230,000 metric tons shipped this quarter, 1,288,000 metric tons last quarter.

BINGO!

SHIPMENTS WERE IN FACT DOWN SEQUENTIALLY!

The conference call says they’re looking for a 4% rise in demand in China and 6% worldwide, but a 15-20% decline in automotive sales for the full year 2009 and 30-35% decrease in heavy trucks (indeed, there was a report out this afternoon on Class 8 truck sales - horrifyingly bad doesn’t even begin to describe it.) But wait! The release also says:

global aluminum consumption is expected to increase 11 percent in the second half of 2009.

Uh…. those numbers don’t add up either. What am I missing here guys and dolls?

The rest of the report seems to make sense - the only other area of trouble I see is in engineered products, which is Alcoa’s highest-margin business and is in serious trouble, down 15% sequentially. That’s mostly aerospace - read “airplanes.” Not exactly a growth industry at present……

I’m disturbed, however, by the apparent discrepancy in claimed numbers in two different places and the consolidated result statement saying that in fact shipments didn’t increase, they fell.

That is hardly the picture of “improving demand” claimed to be experienced in the reported quarter and forecast - especially when that forecast is for an increase that would simply reverse the 3rd quarter tonnage decline implied by pricing and revenues (that is, take us back to second quarter tonnage-shipped levels.)

Finally, there’s the matter of P/E. Assuming we could get to a normalized 12 month leading expectation of 70 cents in fully-diluted earnings by the middle of 2010 (and I believe that’s @#$%&! aggressive) you’re paying 21x on those earnings 12 months out - too darn rich for me for an industrial concern on any reasonable set of forward expectations.

I liked AA in the $5s in March, but I wouldn’t go anywhere near it at $15 today.

Sorry, no $ale.”

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