The first-quarter earnings season is projected to be something of a dud on the bottom line, but that weakness isn’t expected to extend to Alcoa Inc (NYSE:AA) or Alcoa stock.
For the first quarter, year-over-year earnings for the S&P 500 are projected to decline by 4.6%, according to data from FactSet. If the index does post a year-over-year decline in profits, it will be the first time that S&P 500 earnings dropped since the third quarter of 2012.
Happily, the decline in earnings is mostly being driven by companies in the energy sector, which are reeling from the steep fall in oil prices. Alcoa isn’t an energy company, and so Alcoa earnings aren’t expected to suffer from falling prices.
Indeed, Alcoa earnings are forecast to rise sharply, which is just what Alcoa stock needs as it languishes this year.
When Alcoa earnings mark the unofficial start of the Q1 reporting season on Wednesday. analysts expect it to log earnings per share of 25 cents, up from 9 cents a year ago, according to a survey by Thomson Reuters. Revenue is forecast to grow a market-beating 8.4% to $5.91 billion. (The S&P 500 is projected to report a drop of 2.7% in revenue, as the energy sector more than offsets growth in healthcare.)
One might think that such growth should set up Alcoa stock for a good year. After all, in January, full-year Alcoa earnings hit their highest level since 2008. And yet Alcoa stock is getting pounded for the year-to-date.
Alcoa Stock Limps Out of the Starting Gate
A little more than three months into the year, Alcoa stock is off more than 15%, vs. a gain of 1.3% for the broader market. At first look, the drop in Alcoa stock is something of a head-scratcher. After all, earnings are revenue are projected to grow at a healthy pace this year. Additionally, Alcoa is a huge consumer of energy — predominantly electricity — and lower energy prices should be boosting margins.
But it’s not so simple. Although energy prices in the U.S. are low, electricity costs are even lower overseas. That’s why Alcoa is moving much of its production capacity to other countries.
Another headwind for Alcoa stock is that, for as much progress as the company has mades in its strategic transformation, old macroeconomic headwinds remain a powerful force. Alcoa is moving toward selling high-tech engineered products for the automobile and aerospace, which are far more profitable than raw aluminum.
But the market isn’t trading Alcoa stock on the benefits of its transformation. All it seems to care about is the huge growth in aluminum exports from China, which are putting pressure on aluminum prices.
Those worries are likely to weigh on Alcoa stock for some time. Aluminum exports from China — which ballooned 67% in just the first two months of this year — aren’t expected to slow down.
Given that backdrop, it looks like Alcoa stock and Alcoa earnings will run on divergent paths for this earnings season, and probably beyond.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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