Alcoa (NYSE:AA): Target lowered to $3 at Merrill/BAM

From Notable Calls

Merrill Lynch/Banc of America is out neg on Alcoa (NYSE: AA) lowering their tgt to $3 from $6 after reduced EPS outlook. Their rating continues to be Underperform.

Based on a $0.59/lb aluminum price (was $0.88), they are revising down our 2009e EPS to a $1.50 loss (was $0.20 loss). 2010e EPS is revised down to $0.00 (was $0.90) based on a $0.79/lb metal price.

Cash burn situation is the key issue
AA should be able to bring its costs down to ~$0.80/lb in 1H09 ($0.99/lb in 4Q08) but metal prices are expected to remain below breakeven over the near term. Based on lower metal price assumptions, the firm forecasts AA will burn $2.5bb of cash in ’09 if metal prices do not recover (assuming no dividend cut). In their view, a dividend cut could ease AA’s cash burn situation but does not buy much extra time. They believe AA has sufficient liquidity to fund operating losses into mid-’10.

BAS-ML adopting more bearish commodities stance
Today, the Global BAS-ML Commodities Team lowered its price assumptions for aluminum, copper, nickel and zinc (Metals Strategist, 4 March 2009). Aluminum consumption has declined by 15-20% over the past months, but production curtailments have only been about 12%. Aluminum inventories are expected to build and the market is expected to remain in surplus over the next 3-4 years. The surplus is forecasted to reach 807k mt (was 607k mt) in ’09 and recover slightly in ’10 to 514k mt (was 386k mt). This market imbalance will likely keep aluminum prices under pressure over the next 2 years.

Notablecalls: The $3 tgt (50% downside to tgt) reads ugly for Alcoa. I think we are going to see some more downside in the name today.

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