Aluminum producer Alcoa Inc beat Wall Street estimates with its Q1 profit but the recent run up in its shares and in the price of the metal may have raised investor expectations too much prompting a sell off.

Some analysts said that others on Wall Street are encouraged by Alcoa's positive outlook for global aluminum demand growth and they forecast a share price rise in lock step with the metal's resurgence.

Alcoa shares had risen nearly 40% in the 6 months leading up to Monday's earnings report while the aluminum price gained about 15%. But the shares slumped more than 6 percent to USD 16.66 after Alcoa's Q1 revenue missed analysts' targets and the aluminum price slipped 1.3% to USD 2,654 per tonne in London.

Mr David Lipschitz analyst of CLSA Asia Pacific Markets said that cost pressures are likely to persist even as end-market demand for aluminum slowly improves. He raised his 2011 earnings estimate, reiterated his target for 2012 and raised his share price target to USD 15.50 from USD 13. But he maintained the sell recommendation on Alcoa stock that he has had in place since June 2009.

He said that with the recent strength in Alcoa's share price, we believe that investor expectations were for higher earnings. The quarter also benefited from a lower than expected effective tax rate.

Mr Anthony Rizzuto of Dahlman Rose & Company said that the aluminum supply and demand outlook continues to look positive which should boost aluminum prices which is good for Alcoa. Management remains constructive on the prospects for aluminum supply and demand supported by strong growth trends in key end markets.

He said that they believe that Chinese supply pressures are likely to curb capacity build in primary aluminum. Elevated marginal cost of production and tight scrap and physical primary aluminum market conditions should continue to support near term prices despite relatively high inventories.

Mr Rizzuto increased his full year 2011 earnings estimate, maintained his USD 22 share price target and reaffirmed his buy rating. Alcoa benefits from increasing aluminum prices, a shift toward spot and index based contracts for alumina the metal's raw material and sales and operational improvements in its downstream businesses. However some of these benefits will likely be offset by rising raw material costs and adverse currency movements.

(Sourced from Reuters)