Foiled again

AlcoaPhoto
Sponsored By:

Alcoa Earnings: Should We Be Excited … or Terrified?

It’s been a slow few days — Dumpster fires at Hewlett-Packard (NYSE:HPQ) notwithstanding — so I figured it is time for my perfunctory quarterly earnings preview to prime the pump for a busy week after the holiday weekend.

Alcoa (NYSE:AA) is first in the barrel, as always. And like it or not, this aluminum giant is seen by many as a bellwether for the entire earnings season.

So should we be excited? Or should we be terrified going into Tuesday’s Alcoa earnings event?

Well, I’m not terrified … but I’m definitely nervous. Here’s why I’m worried about Alcoa stock specifically, and the market generally as we enter a third-quarter earnings season that might be characterized by declines in both revenue and profits for many companies.

Specific Troubles for Alcoa

The obvious reason for my concern is because back in December, I recommended this cyclical materials stock as part of the InvestorPlace 10 Best Stocks for 2012 feature, and I put my money where my mouth was by throwing some actual cash behind it. The theory: Alcoa was right-sized after the recession, baseline demand and pricing would remain firm, and maybe by late 2012 we’d see the beginnings of a secular recovery that would send cyclical stocks like AA soaring.

Well, Alcoa is up 5% year-to-date (lagging the market) because demand has moved sideways and the recovery has not arrived. I’m sticking with it as a long-term play, but I have no illusions that this quarter is going to catapult me into first place for our yearlong stock picking contest.

The bottom line is that the bottom line isn’t looking all that hot. Alcoa earnings for Q3 should mark a roughly 33% slide in profits, however — and a nearly 15% slide in top-line revenue, too. Full-year earnings will be down overall in 2012 if estimates hold, and while prospects brighten up next year, Alcoa still seems to be facing some short-term headwinds.

After last quarter’s earnings miss, another downside surprise this time around could be very ugly for AA stock. Alcoa already has lagged the market year-to-date, but if expectations continue to head south, I might have to write off 2012 as a lost year in this investment.

What Alcoa Says About the Market

You might not think Alcoa earnings and its aluminum sales are much of an indicator of global economic health anymore, and that’s a fair point. However, the broader story of struggling against a “new normal” and squeezing more profits out of efficiencies as the top line stagnates — that is a pretty universal story these days.

You can blame China — like Caterpillar (NYSE:CAT) did when it reduced guidance recently. You can blame Europe, like General Motors (NYSE:GM) has for a few months now. You can blame the fiscal cliff like Boeing (NYSE:BA) has been doing.

But whatever the reason, the story is the same — businesses are selling less, and making less profit as a result. Alcoa earnings are sure to reflect that narrative.

Wall Street analysts expect earnings for the average S&P 500 company to decline in the third quarter from the same period a year ago, according to Thomson Reuters data. That’s the first such drop since the third quarter of 2009 — when we were comparing pre-crisis numbers to post-crash numbers for many stocks. Additionally, earnings won’t just be down year-over-year if forecasts hold, but also quarter-to-quarter based on Q2 numbers.

Here’s a pleasant chart for you visual types, via Zero Hedge.

If you’d prefer your bad news in written form, take a look at the rather stark drumbeat of warnings as we approach earnings. This, from a MarketWatch report a few weeks ago:

“‘It is interesting to us that defensive sectors of the market have performed relatively well behind the official announcement and launch of QE3,’ said Clark Yingst, chief market analyst from securities and investment banking firm Joseph Gunnar.

‘The strength could reflect investor skepticism regarding the impact of QE3 on real economic activity,’ he said. ‘It could also be attributable to concerns regarding pending earnings reports in cyclical economically-sensitive sectors of the market, concerns that, in our view, are warranted.’”

And most bluntly: A headline on Sept. 25 in Barron’s reads, “Could Weak Earnings Torpedo the Stock-Market Rally?”

Alcoa earnings will be the first of many reports showing numbers like this. Given the soaring returns of Wall Street in the past nine months, it’s hard to imagine that investors are going to take earnings drop after earnings drop well. It’s going to take some significant beats against expectations to overcome the general decline in profits.

Maybe Alcoa earnings will set the pace for a bullish Q3 season by handily beating expectations … or maybe it will set the pace for an ugly earnings season by missing even the low bar set by analysts.

Either way it’s worth watching, even if you don’t own AA stock like I do.

Related Reading

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

Hey Apple users! Get The Slant podcasts delivered right to your iPhone or iPad via the iTunes Store.

Get The Slant delivered to your inbox every day!

Comments
  • EdInvests

    I can see no relationship between AA and virtually anyone else. Al is down as a commodity, and virtually every other one is up. The move to more MPG has made plastics and carbonfiber a better alternative to Al. The trend to recycling is a good thing (90% less energy to recycle than smelt bauxite), but it hurts a company like AA. The mere fact that they are still in the game is a plus for everyone else. I no longer think of bad times for them as a negative, but I will find a positive direction for them as a huge bellweather for the rest of the market. You have to think about the fact that aluminum windows were in almost every home until we found out that it was horribly energy ineffecient. There is a place for Al, but it is no longer a sign of future earnings for any other company. I also think that Q3 results for others might disappoint a little, but I believe we will be far happier with Q4, and really happy next year. We are coming out of the worst, and things will get progressively better. I am also slowly selling my high profit gainers, and buying back in before year end or so. It just makes sense to take the gains now with unknown tax consequences and the fact that things are at highs. I also intend to carry a large cash position for the next months and buy quality stocks when the market falls. That has to be the bargain sale of all times. Timing is everything.