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Alcoa Earnings Prove Expectations – Not Profit Declines – the Real Story

So that earnings bellwether Alcoa (NYSE:AA) has kicked off Q3 earnings. And the results were mixed, as expected.

Fair warning, investors, because this is pretty much the way things are going to play out for the next few weeks.

Here are the specifics:

  • Alcoa earnings were in fact a loss of 13 cents a share.
  • Excluding one-time charges (including a big lawsuit settlement), Alcoa said it earned 3 cents a share.
  • The Street was looking for a break-even quarter so this topped estimates.
  • The top line at Alcoa declined 8% to $5.8 billion thanks in large part to soft aluminum prices.
  • But Alcoa earnings topped on the revenue side, too, as the forecast was only for $5.56 billion.
  • Due to a slowdown in China, Alcoa also lowered its 2012 forecast to 6% growth, down from 7% previously.
  • Alcoa shares rallied mildly after hours.

So, show of hands: Who is surprised by any of this Alcoa earnings news?

Nobody? … Well, me neither. You see, I am long in Alcoa stock and have been for a while on the premise that the “new normal” of soft demand has been baked in to shares. Thus investors have low expectations, and even a modest sign of life at Alcoa is warmly received.

It’s going to be interesting to see whether this trend plays out market-wide, of course. There are some folks who think that the earnings slowdown is going to brutalized stocks in Q4… but others are convinced that the long history of Wall Street underestimating stocks is going to fuel a bunch of big surprises due to lowball forecasts.

Remember, the majority of stocks have beaten the Street every year since the third quarter of 1998! 

So this isn’t an Alcoa thing. And while the story will likely be the same for companies like U.S. Steel (NYSE:X) or Southern Copper (NYSE:SCCO) due to similar demand and pricing pictures, it’s not a materials story or a cyclical stocks story either.

This is going to be how just about every stock on Wall Street is measured in the coming weeks: With low forecasts and an expectation of trouble due to a soft macro picture.

There are exceptions to this, notably with discounter Costco (NASDAQ:COST) reporting earnings Tuesday with predictions of a mild earnings gain or newly-minted organic foods darling Annies (NYSE:BNNY) reporting Wednesday with growth on the mind of all of those who piled in the recent IPO. But with the first earnings contraction in the S&P 500 since 2009, you can bet the attention will be on those plotting a rollback most of all.

Thankfully for these companies, the bar is set low. And as investors are forward-looking creatures, it might not necessarily be a death knell for companies to simply post a year-over-year decline for Q3.

After all, the decline is expected and priced in. What happens down the road — and how it matches up with expectations — is really all that matters.

Alcoa earnings proved that pretty definitively.

Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he owned a position in Alcoa but no other stocks named here.

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