Alcoa: Smelter Skelter

Aluminum producer Alcoa (AA) kicked off earnings season with a big profit miss and subsequent selloff in Wednesday trading.

Alcoa's finance chief, Chuck McLane, said the third-quarter shortfall occurred against an increasingly grim global backdrop. Aluminum prices dropped nearly $1,000 a ton from a high of $3,271 on July 11, to a low of $2,377 on Sept. 30. The total quarterly price decline of $700 was the largest ever recorded. He said the financial crisis, weakening market fundamentals and subsequent inventory builds and the strengthening of the U.S. dollar against other currencies also played a role.

"During this downturn, several of the raw material input costs have continued to rise and we have yet to realize the full impact from lower energy prices and the stronger U.S. dollar in our cost structure," McLane said in a Tuesday evening conference call.

At the end of last month, Alcoa shut down its smelter in Rockdale, Texas, which cut earnings by about four cents a share, according to Desjardins Securities analyst John Redstone. Another five cents came out of currency moves.

"Disappointing numbers," Redstone wrote in a Wednesday research report. "Alcoa clearly struggled with lowe-than-expected volumes and margins, and higher-than-expected costs in 3Q '08. We do not expect the situation to improve significantly in 4Q '08."

He dropped his full-year forecast to $1.96 a share, below the Street consensus estimate of $2.10 a share. For the third quarter, Alcoa earned 33 cents a share vs. 63 cents a year earlier. Both periods included one-time items.

Brian Niemiec, a Susquehanna Financial group analyst, says Aloca's announcement of capital spending cutbacks follows the company's expectations from customers.

"They're not going to produce all this aluminum and build new smelters if everyone is cutting back," he says, citing reduced demand from the automobile industry.

The grim global backdrop, though, makes it tough to say this dip is a buying opportunity.

"At these levels, in my opinion, it is a buy or very near a bottom," Niemiec says. "But it's hard to step on front of the fear factor, and it's hard to make a fundamental global call."

Bottom Line: Buy
Today's wild market fluctuations won't last forever, and a post-crisis world will keep building things and using aluminum.

MetLife: Insuring Share Volatility

MetLife (MET) stepped up Tuesday night and took its earnings lumps a few weeks early, pre-announcing a miss for the third quarter and plans for a 75 million share offering.

Wall Street analysts, on average, expected the company to earn $1.44 a share, but the insurer said quarterly operating earnings will range from 83 cents to 93 cents when it posts results on Oct. 30. The company said investment losses accounted for 16 cents of lower estimates, but that "relative to the size of MetLife's $324 billion general account portfolio, the company's level of realized investment losses has remained modest."

Keefe Bruyette & Woods analyst Jeffrey Schuman wrote Wednesday that the capital raise would yield about $2.8 billion based on Tuesday's closing price of $36.87 a share, and discounting any oversubscription. He says recent offerings by more troubled competitors such as the Hartford Financial Services Group (HIG) and Lincoln National (LNC) make it "difficult to get transparency into current decision making processes for capital raises." By his estimate, Hartford had "at least some capital margin" before its raise, and that MetLife still has a capital margin of several billion dollars.

"Certainly in the case of MET, there has been no visible rating agency pressure, and 3Q results, although light on an operating basis, were nowhere near a capital event, and net income was stronger than expected," he wrote. "MET has described the offering as supplementing a strong capital position and potentially supporting 'strategic initiatives,' which we interpret as potential acquisitions."

Sterne Agee analyst John Nadel wrote on Oct. 3 that last week's "extreme selloff" was based on market fear, and that its capital position was basically sound.

"Discussions with management leave us very confident in the company s strong liquidity profile," he wrote, adding that "we view the securities lending portfolio as a risk solely to earnings, not to liquidity or capital."

Bottom Line: Buy
This company will be left standing when the dust settles, and it should have a sizable war chest to pick up the best parts of its fallen competitors, bolstering its longer-term prospects.

Gold Fields: All That Glitters

Another day of plunging stock markets pushed the price of gold up about 4% to $917 an ounce on the New York Mercantile Exchange, driving American depositary shares of lower quality gold producers such as South Africa's Gold Fields International (GFI) up sharply.

The sharp spikes by Gold Fields, South Africa's second-largest gold producer, and Harmony Gold Mining (HMY), the third-biggest producer, were unsurprising as investors sought safe havens. Mining stocks are closely linked to the prices of metals, and gold has seen a 20% bounce since its recent low of $740.75. But volatile times mean volatile pricing. Gold peaked at $986 an ounce in July, when the market was in turmoil that now seems less scary compared to current conditions.

David Haughton, an analyst with BMO Capital markets, says investors should consider the inherent volatility of gold mining stocks and evaluate companies based on their relative value, growth potential and execution of growth potential.

By those measures, the South African producers are risky bets. Mining there is a labor-intensive, deep underground process, and it's been difficult to contain costs due to labor issues, energy prices and the movement of the South African rand against the dollar.

"Those stocks that have performed well throughout al this cycle have been those that are still perceived to be relatively low risk but still having growth," he says.

Canadian producers such as Goldcorp (GG), Kinross Gold (KGC) and Agnico-Eagle Mines (AEM) have shown less volatility. The South African stocks incurred sharper losses, and Gold Fields remains down 56% for the past year, even after Wednesday's boost.

"Don't be afraid of paying a premium for a good quality stock," Haughton says.

Bottom Line: Hold
Gold will likely rise further as investors stay ultra-twitchy, but keep your finger near the sell button once the crisis subsides.