A major brokerage firm cut Alcoa Inc's investment rating and profit estimate on Wednesday, expressing doubts that Wall Street would like new Chief Executive Klaus Kleinfeld's strategy for the aluminum company.

We believe the market will be disappointed with both the strategic direction from the new CEO, Klaus Kleinfeld, and the company's near-term earnings due to higher than expected input (raw material and energy) costs, J.P Morgan analyst Michael Gambardella wrote in a research note.

He said he supported Kleinfeld's approach to creating shareholder value by improving the performance of Alcoa's downstream consumer products businesses. Alcoa also has upstream operations which mine bauxite and produce alumina, which is smelted into aluminum.

(But) we believe the market is fixated on the quick value fix of extracting the downstream from Alcoa's upstream alumina and primary segments.

As a result, we think the market will be very disappointed by Alcoa's intent to remain a conglomerate regardless of how effective Kleinfeld might be at creating value in the long term, Gambardella wrote.

Kleinfeld, who joined Alcoa as president and chief operating officer last August, was elected chief executive officer last month, replacing Alain Belda. He was previously president and CEO of the German-based electronics and industrial conglomerate Siemens AG.

Under Belda, Alcoa sold one of its packaging and consumer businesses to New Zealand's Rank Group Ltd for $2.7 billion.

Shares in Alcoa fell 6 percent on Wednesday after J.P. Morgan cut its investment rating to neutral from overweight and also lowered its 2008 earnings estimate for the company to $2.18 per share from $2.70.

The downgrade came amid speculation that Alcoa is an acquisition target and after the company warned that second-quarter earnings will be 2 cents or 3 cents per share lower as a result of gas disruptions at its Australian operations.

On Monday, Alcoa was named in a Brazilian newspaper report as a possible target of giant miner Vale, which is reported to be working on a more than $30 billion bid for one of the world's largest mining companies.

In Wednesday's research note, Gambardella said he believes market expectations of a sale of Alcoa are incorrect. While the market appears to be discounting a sale of Alcoa or at least some sort of spin-off to separate its upstream from its downstream businesses, we believe that both of these assumptions are incorrect.

Instead, we think Alcoa will not only remain a conglomerate but that it is also likely to grow both its upstream and downstream businesses organically and even through acquisitions, the J.P. Morgan analyst wrote.

He also wrote that while aluminum prices might be 17 percent higher in the second quarter than the first, these gains will be largely offset by higher raw material costs and unfavorable currency trends. Cost pressures will likely accelerate in the second half of 2008, Gambardella wrote.

In afternoon trading on the New York Stock Exchange, Alcoa stock was down $2.58, or 6 percent, at $40.14. (Reporting by Steve James; Editing by Gerald E. McCormick)

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