Alcoa — How to Play Tuesday’s Earnings Report

by Jamie Dlugosch | October 10, 2011 12:53 pm

Third-quarter earnings season officially kicks off Tuesday, with Alcoa (NYSE:AA[1]) reporting earnings for the period ending Sept. 30 before the market opens. With global markets in disarray, we will learn much about economic activity with the release of results.

More important will be guidance for the future. Many analysts are beginning to slash 2012 estimates. As we get closer to 2012, results will be a better barometer of how accurate those predictions might be. What Alcoa says about sales and profits will go a long way toward predicting where markets move from here.

Alcoa’s products are used in the manufacturing of aircraft and automobiles. Both of those sectors are performing decently in 2011. Despite the specter of a declining economy, aircraft orders in the third quarter[2] were slightly higher than the year-ago period. That should help ease some of the concern regarding Alcoa’s earnings in coming quarters.

During the past four quarters, Alcoa has met or beaten average Wall Street estimates:

Chart18 Alcoa    How to Play Tuesday's Earnings Report[3]

In early July, the company reported second-quarter results[4] that met expectations for earnings and exceeded estimates of revenue. The report was upbeat and positive. Since that time, optimism for Alcoa’s third-quarter earnings have faded. Ninety days ago, the average Wall Street estimate for the third quarter was 34 cents per share. Today, the expectation is for Alcoa to make 22 cents per share.

The decline is directly related to falling aluminum prices during the third quarter. If manufacturing costs did not drop at the same pace, profit margins for Alcoa should be lower in the period. For the full year, Alcoa is expected to make $1.04 per share. In 2012, profits are expected to grow by 15% to $1.20 per share.

Chart28 300x173 Alcoa    How to Play Tuesday's Earnings Report
Click to Enlarge
At current prices, shares of Alcoa trade for nine times current-fiscal-year estimated earnings. Since the last earnings report, AA shares have fallen in value by 39%. The stock is trading slightly lower than a year ago.

Also, at the time of the last report, Alcoa was upbeat with respect for demand to aluminum. Since then, the market has tanked on speculation of a double-dip recession and fears of financial chaos in Europe, and aluminum prices have fallen — as have analyst estimates for AA.

That said, the expectation is for the company to deliver double-digit profit growth in 2012. And with shares trading today for less than 10 times earnings, shares are cheap relative to expected growth.

I expect the company to easily meet greatly reduced expectations for the period. With aircraft and auto sales as strong as they are, there should be no issue or surprises with respect to guidance. Alcoa shares are pricing in economic Armageddon. The numbers should help to dispel negative speculation. A strong report will send shares up 5% to 10%.

Endnotes:
  1. AA: http://studio-5.financialcontent.com/investplace/quote?Symbol=AA
  2. aircraft orders in the third quarter: http://news.businessweek.com/article.asp?documentKey=1376-LSNIUI1A74E901-5EK98GLKSU1JPLVHP1JOH8MQOU
  3. [Image]: http://investorplace.com/wp-content/uploads/2011/10/Chart18.jpg
  4. reported second-quarter results: http://money.cnn.com/2011/07/11/news/companies/alcoa_earnings/index.htm

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