Alcoa kicked off earnings season on Monday, beating analyst estimates. Income from continuing operations came in at $137mm, or $0.13 per share, compared to a year-over-year loss of $312mm or $0.32 per share and a $194mm loss or $0.19 per share sequentially. Analysts were expecting Alcoa to earn 12 cents for Q2. Revenues increased 6% quarter over quarter, mainly driven by higher volumes in key end markets. EBITDA margin was 14%. This increase in margins can me attributed to Alcoa's continuing cash sustainability initiatives, mainly in the area of decreased head-count. They also managed to generate positive free cash flow.
Although LME Aluminum prices have decreased dramatically during the quarter, stronger volumes coupled with lower energy costs and favorable exchange rates more than offset this decrease in prices. FCF came in at $87mm, and Alcoa has $1.34b in cash on hand. This increase in FCF is being driven by Procurement reductions, overhead reductions, and days in working capital reductions, all part of Alcoas continuing CSI.
Management projects that aluminum demand will increase 10%-12% in 2010, and are maintaing their long term outlook of 6% CAGR growth through 2020. Demand will increase in lightweight, versatile materials for building, as well as other key markets as a result of increasing global population, and the need for recyclable and lightweight materials in the automotive industry.
Looking forward I believe that global economic recovery will help drive Alcoa's earnings. Management has done a great job steering the company through rough operating environments, and these initiates will increase Alcoas ability to generate cash going forward. As worldwide demand increases for aluminum, Alcoa will benefit from higher realized LME pricing, increasing margins and Income. Some risks going forward include tightening in China, as China is the largest producer and consumer of Aluminum in the world, and pricing is directly correlated to their usage. I recommend a HOLD rating on Alcoa, but will have to update my model for a new target price.