Alcoa profits suggest murky earnings season
Alcoa unofficially kicked off first-quarter earnings season Wednesday, and its results — profit that topped estimates and revenue that didn’t — hinted that the upcoming deluge of earnings news might be a bumpy ride.
The company reported an adjusted quarterly profit of 28 cents a share, 2 cents better than expected, says S&P Capital. It was at least the fifth quarter in a row that Alcoa’s earnings had topped estimates, and a reason for optimism that companies as a whole might deliver better earnings than expected.
Investors always watch Alcoa’s results closely. It’s one of the first big companies to report earnings every quarter and has been a beacon of strength as one of just 12 companies in the Standard & Poor’s 500 that has beaten earnings expectations for at least the four straight quarters by 10% or more. And it is involved in many areas of the economy, ranging from aerospace to automotive, and has large customers overseas.
Earnings topping expectations will be key to maintain investors’ comfort level with current stock valuations. Stocks have marched higher despite the fact that an “earnings recession” is likely in the first quarter. Analysts are calling for profit reported by companies in the S&P 500 to fall roughly 3% in the first quarter, says S&P Capital IQ. That’s disappointing because analysts back in January thought earnings would rise 5.6%.
There is no panic yet. The earnings decline for the first quarter is based on estimates. Companies typically beat earnings estimates, and that could bring the actual growth rate dur- ing the quarter to closer to flat or even in the growth territory. So far, 19 companies in the S&P 500 have reported earnings and 16 have beaten expectations through Tuesday.
The earnings decline is also a bit of a distortion. A vast majority of the expected earnings recession is due to the implosion of oil profits. Analysts expect 1Q profit by S&P 500 energy companies to plummet 64%. That more than erases the fact that analysts expect profit in five of the 10 S&P 500 industry sector to grow. Financials, health care and consumer discretionary companies are seen putting up the biggest growth during the quarter of 10.9%, 9.1% and 7.3% respectively.
But the fact remains many of the easy profit gains — due to cost cutting — are evaporating and companies need to find new drivers of demand. Companies in the S&P 500 are also likely to post 1.1% lower revenue during the quarter, creating a squeeze from the top. And that was the troubling aspect of Alcoa’s results: Quarterly revenue of $5.8 billion missed expectations by 2%, says S&P Capital IQ.
One wild card for Alcoa — and others — is global growth. And that’s something investors will be watching as earnings season unfolds. “Assuming decent global economy growth, Alcoa is still a very undervalued stock,” says Argus analyst William Selesky.