Alcoa Story Likely a Third-Quarter Prologue

Aluminum has joined the metals party. But it likely arrived too late to help Alcoa Inc.'s third-quarter results.

The aluminum company's earnings, due Thursday, mark the unofficial start of third-quarter earnings season. While the prior two quarters underscored a strong rebound in U.S. corporate profits, this one is likely to be a more muted affair.

Analysts expect earnings for S&P 500 companies will increase about 24% from a year ago, compared with 39% in the second quarter. The frequency and size of upside surprises, a catalyst for the stock market, also are likely to diminish.

Alcoa's results are likely to fit that theme.

Analysts expect earnings of six cents a share, up from four cents a year ago but below the 12 cents Alcoa earned in the second quarter. The sequential decline stems largely from the 6% drop in average aluminum prices during the period. Citigroup analyst Brian Yu expects that will be a main reason for after-tax operating income for its four main business lines to drop by more than a third to roughly $239 million on a sequential quarterly basis.

That performance will be tough for investors to accept. But the recovery in aluminum prices lately should help.

Prices are up about 18% over the past six weeks and settled

Wednesday at $2,365 a metric ton on the London Metal Exchange, or $1.07 a pound. That puts the price within striking distance of this year's $1.13 high, set in April.

At current levels, the price would translate to fourth-quarter earnings of 20 cents a share, Mr. Yu calculates.

But while the company's shares have rebounded lately, they still are down 24% this year and trading at just over 12 times estimated 2011 earnings. Partly, that reflects skepticism over whether the aluminum rally can last.

Unlike precious metals such as gold, it is relatively easy for producers to start up smelters and raise the supply of aluminum in the market. And global inventories already are near records.

At the same time, demand for aluminum could be stunted by still-weak international growth prospects. If supply and demand start working against aluminum prices, Alcoa may find it has little time to enjoy the rally.