Alcoa (NYSE:AA) stock is set to soar today after strong first-quarter earnings. But stock market investors should know that the surprise profit in the Alcoa earnings report bodes well not just for this pick, but for the whole of earnings season.
Specifically, Alcoa’s first-quarter net earnings hit $94 million, or 9 cents a share. Excluding special items, AA earnings hit 10 cents a share. No dramatic totals there, but the profit is noteworthy considering Wall Street was expecting Alcoa to actually post a loss of about 3 cents per share.
Why should you care? Well, for two reasons:
- Alcoa is a proxy in many ways for the global manufacturing sector. After big losses, job cuts and a brutal slide in stock price, AA now appears to be on the mend.
- Alcoa is a psychological torch bearer each earnings season, and this impressive showing will help shape a broader narrative of continued corporate earnings growth in the face of lingering uncertainties.
A distant third would be, of course, because success in AA stock proves I actually know what I am talking about. I did, after all, pick it as my single best buy-and-hold investment for all 2012 in the InvestorPlace.com “10 Best Stocks for 2012” contest. (Disclosure: I am long AA and have been since December. Read my original recommendation here.)
Alcoa Is a Proxy for Manufacturing
Good Alcoa earnings are a good thing for manufacturers, suppliers and a host of other companies. Base metals are not speculative like gold, but very much utilitarian and very much tied to general business and consumer activity.
It was no surprise that Alcoa flopped in dramatic fashion during the Great Recession, seeing its share price plummet from about $43 in 2008 to almost as $5 in early 2009. The losses were brutal, and the company slashed 13,500 jobs, or 13% of its workforce, in one fell swoop. Demand slumped, supply drove down prices and revenue lurched more than 30% lower from 2008 to 2009.
But now? Fundamentals have been improving, and Alcoa is soundly back on profitable ground. Fiscal 2012 revenue could top fiscal 2008 numbers if all goes well, and a restructuring has beaten back debts and made the company more agile. The surprise profits in this report are just more recent proof after Alcoa posted strong earnings on Jan. 9.
All in all, the company has seen nine straight quarters of year-over-year revenue growth.
The optimism Alcoa investors should feel after this report is obvious, but what’s almost as important is what these numbers mean for other supply-chain stocks — whether they be direct comparisons like base metal and materials stocks that include Norsk Hydro (PINK:NHYDY), Rio Tinto (NYSE:RIO) and U.S. Steel (NYSE:X) or a true end-product manufacturer.
Yes, times have been tough, and manufacturing-related stocks remain a fraction of their previous might, but wise restructuring is starting to pay off. Not only are companies like Alcoa profitable again, but they’re profitable in a period of weak demand and price pressure. Imagine what the next few years will hold if a recovery gains momentum.
It sure was painful to watch Alcoa suffer a sharp decline in 2011 amid sovereign debt fears and economic uncertainty gripping the globe in the summer months. But that sell-off wasn’t the final word. Earnings and revenue continue to mend despite the fact that Alcoa shares remain almost 50% off 52-week highs.
In short, Alcoa is signaling the opportunity in “unsexy” materials and manufacturing stocks. These stocks remain big values, especially ones that fell hard but are finally starting to get their feet back under them — like Alcoa.
Alcoa Is an Earnings Standard Bearer
Much fuss is made about how Alcoa “kicks off” earnings season every quarter. I mean honestly — can’t financial journalists come up with a different phrase, or do we have to have the same damn headline every 90 days?
Ninety percent of the correlation between Alcoa and a broader earnings season narrative is bunk. However, that’s not to say there isn’t a correlation to be made sometimes — as long as we admit the link is due to broader economic trends, not some magical “earnings mojo” exuded by Alcoa’s filing.
Here’s the gist of this quarter’s narrative, filtered through Alcoa: Investors, who have been fretting over very real macro concerns, will once again be reminded of the simple truth that corporate profits are marching upwards nicely once more.
This could very well be the 10th straight quarter of year-over-year earnings growth for the S&P 500.
Sure, things aren’t as happy as they were in the go-go 2000s — when funny money artificially created jobs, houses, consumer spending and a host of other imaginary economic engines. But unemployment is at a three-year low.
And from a pure investor-centric perspective, the IPO market has heated up again, and the markets were challenging levels not seen since 2007’s peak before the recent multi-day slide.
Of course, Alcoa could be an outlier, and other ugly earning reports could reshape the narrative in the days ahead. But judging by the past few earnings seasons that have seen big profit and sales increases despite lingering uncertainty, it’s more likely that Alcoa is an example than an exception.
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, Jeff held a long position in Alcoa.