Forget Alcoa — This Company Is a Better Earnings Barometer

by James Brumley | December 20, 2012 8:52 am

FedEx (NYSE:FDX[1]) fans cheered the company’s quarterly results on Wednesday, bidding the stock up as much as 3% to multi-month highs.

The shipping company earned $1.39 per share in fiscal Q2, which was weaker than the year-ago figure of $1.57 and even fell short of the expected profit of $1.41 per share, partially thanks to Hurricane Sandy. Still, revenue ramped up from $10.6 billion a year earlier to $11.1 billion last quarter, handily beating estimates of $10.84 billion.

Clearly the market chose to see the glass as half full, with the company still managing to fare better on the profit front than some had prepared for. The fact that FedEx is maintaining its full-year forecast in the face of economic red flags certainly helped the market come to its bullish conclusion as well.

For some investors though, FedEx’s results go way beyond FedEx itself.

The New Alcoa?

Alcoa (NYSE:AA[2]) is generally regarded as the harbinger of earnings season and a barometer of that particular quarter’s earnings success. But, that’s an antiquated — and possibly dangerous — assumption. Aluminum isn’t a core material of national or global economic growth anymore and, even if it was, Alcoa is still ultimately subject to stunningly volatile aluminum prices.

In other words, Alcoa may not be the tone-setter you think it is. By virtue of the timing of its earnings reports and the broad nature of its business, FedEx instead could be the better marketwide earnings barometer. The question is, does the theory hold water? The nearby table tells the tale.

As is the case with most assumptions, the truth here is somewhere in the middle. You can see common success between FedEx and the broad markets most of the time the shipping company was doing well. For instance, in the latter part of 2011 and early 2012, FedEx was knocking it out of the park, topping estimates on a regular basis and putting up huge year-over-year growth numbers. The market followed suit during that same period.

The only red flag might be the S&P 500’s weak “earnings beat” rate of 59.7% for the first quarter of 2012. But, even then the S&P 500 managed to grow the year-over-year bottom line by 7.4%, which is pretty strong given the situation.

Similarly, when FedEx posted what you could consider poor numbers, the market’s results generally corresponded. Take calendar Q3 of this year for example. FedEx posted its first decline in earnings in years, and so did the market.

Simply put, there’s a basic success/failure correlation between FedEx and the S&P 500 as a whole. It’s not a great one, but decent one … a stronger correlation than we can see between Alcoa and the market anyway. Take a look.

Alcoa’s earnings are all over the map — some good and some bad, but never reliable enough to actually use as a barometer for earnings season. 

Bottom Line

One thing to note about the data being dissected here: The number of S&P 500 companies that beat or failed to beat earnings estimates in any given quarter has surprisingly little correlation with earnings growth in that particular quarter. While both might ultimately impact how well (or badly) the market performs during earnings season, one doesn’t necessarily have anything to do with the other.

Even more important for traders who make bigger-picture decisions based early individual company results, though, is the simple fact that Alcoa isn’t the name you want to play that game with. FedEx is a much better choice.

With that being the case, those traders should be alarmed that FedEx’s quarterly income just slipped over 11% on a year-over-year basis.

As of this writing, James Brumley did not own a position in any of the aforementioned securities.

  1. FDX:
  2. AA:

Source URL:
Short URL: