Alcoa: From Bellwether to Red Herring

by Dan Burrows | January 8, 2013 11:54 am

Alcoa (NYSE:AA[1]) will kick off fourth-quarter earnings season today after the closing bell, but while Wall Street’s hopes for the aluminum giant are running high, the same can’t be said for the broader market.

Alcoa — the Dow component and bellwether for the cyclically sensitive materials sector — is expected to swing to a year-over-year profit, helped by stable commodity prices and the closure of some of its less-efficient plants. S&P 500 companies as a whole, however, are forecast to post another quarter of tepid earnings growth, hurt once again by sluggish sales and a relatively strong U.S. dollar.

On average, analysts expect Alcoa to report adjusted earnings of 6 cents a share versus a year-ago loss of 3 cents a share, according to data from Thomson Reuters.

Although revenue is forecast to decline 6.5% to $5.6 billion from $5.99 billion a year ago, Wall Street reckons that higher margins should more than make up the difference to push Alcoa back to profitability — at least after special items are excluded.

After tumbling amid too much supply in face of waning global demand — notably from China — aluminum prices appear to have finally stabilized. Equally important, Alcoa is cutting costs and boosting margins by shuttering some of its least efficient smelters.

Indeed, the company cut production by 12% in the last year — a much-needed step considering that global stockpiles of aluminum are at record highs. The price of the metal has recovered to 93 cents per pound from as low as 59 cents in early 2009 — but that’s still far off the peaks of more than $1.40 per pound hit five years ago before the global economy rolled over.

Alcoa appears headed in the right direction; the same can’t be said for the rest of the market.

S&P 500 earnings are forecast to grow just 2.4% in the fourth quarter, according to FactSet data. That’s down from an estimated earnings growth rate of 9.2% as recently as Sept. 30.

As we saw in the third quarter, earnings will be tamped down by sluggish revenue growth, hurt partly by weakness in Europe — much of which is back in recession — and the related stronger dollar[2]. Less-than-robust demand from China and other emerging markets also is weighing on U.S. corporate sales.

That has analysts forecasting S&P 500 revenue growth at only 2.1% for the most recent quarter, down from a prior estimate of 2.7% at the end of September.

As is always the case, not all sectors are expected to disappoint, as you can see from the chart, courtesy of FactSet, below:


Financials will once again lead the earnings pack, as profits are forecast to increase 15.5% year-over-year. (However, even that’s down from a forecast of 16.1% as recently as Dec. 31.)

After financials, telecoms are the only sector forecast to post double-digit-percent earnings growth. Utilities, materials, consumer discretionary, energy and consumer staples are all expected to produce higher earnings YOY at the sector level.

Weighing the most on aggregate earnings growth will be the industrial, tech and healthcare sectors, as profits will come up short mostly in the airline, semiconductor and pharmaceutical industries.

For stocks as a whole, well, there’s just no way around it: Once-torrid corporate earnings growth is slowing down. True, that didn’t stop the market from gaining more than 13% last year … but if at some point that deceleration starts to weigh on U.S. equities, don’t say we didn’t warn you.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

  1. AA:
  2. the related stronger dollar:
  3. [Image]:

Source URL:
Short URL: