Alcoa's earnings: A sign of surprises to come?

The key takeaway from the company's report is that earnings may now surprise us not by being great, but simply by being less bad than we expected.

By The Fiscal Times Apr 11, 2012 3:51PM
Alcoa stockBy The Fiscal TimesSuzanne McGee

Investors were bracing for an unpleasant announcement when Alcoa (AA) announced its first-quarter results after the bell Tuesday, anticipating that the company would report a loss of a few cents a share.

That would have marked a gloomy start to what is expected to be an underwhelming and even outright depressing earnings season, one that most analysts expect will conclude with S&P 500 companies posting results that are flat over year-earlier levels, or at best up one or two percentage points.

Little wonder, then, that the Standard & Poor's 500 Index ($INX) on Tuesday posted a loss for the fifth straight session -- this time, the largest decline it has recorded in more than four months: 1.7%, or 23.61 points.

But Alcoa surprised everyone by reporting a profit. Analysts had forecast a loss of 3 to 4 cents a share; the company instead reported a profit of 9 cents a share, as some businesses, such as its aerospace division, picked up the slack and helped offset the impact of higher energy costs and plunging aluminum prices.

The company's surprise profit -- even though it's nearly 70% below year-ago profit levels -- triggered jubilation and buying on the part of investors. Alcoa's stock jumped more than 7% at the start of Wednesday's trading, and stocks overall opened the session nearly 1% higher.

The question remains, however: To what extent is Alcoa's positive surprise a harbinger for first-quarter earnings? It's important to note that the profit was generated in part because of more aggressive cost cutting and equally aggressive efforts to boost revenues at divisions whose fate is less tied to commodity prices, rather than on gains from a stronger economy. At best, Alcoa's results are sending mixed signals.

In fact, while the broader market is staging a bit of a relief rally this morning in response to the better-than-expected news from Alcoa, the key takeaway from Alcoa's report is that this is a quarter where earnings surprises can be categorized as "not quite as bad as we had expected" rather than by how solid they were and how upbeat comments from management were during the conference call. That's an important shift.

For stock prices to continue to zoom higher long-term, and investor anxiety to abate, positive earning surprises have to fall into the latter category. Analyst expectations for results at most S&P 500 companies have been steadily scaled back over the course of the first quarter, and beating a lowball number is less of a feat than clearing a higher bar. After all, Alcoa's profit -- however pleasant a surprise -- was a fraction of what it was in the first quarter of 2011.

The big unknown is how much of this still-bearish outlook is baked into stock market valuations at their current levels. It has been clear for some weeks now that first-quarter earnings results were going to fall significantly short of the kinds of double-digit gains recorded in recent periods. But investors are now actively seeking out the bad news to justify their nervousness after months during which the stock market has rallied with tremendous consistency and rewarded us with the best first-quarter performance in well over a decade.

That translates to a lot more noise and volatility surrounding each significant earnings result that hits the headlines. It's more important than ever before to be prepared to stick to your guns, to be confident that you own a stock you'd still want in your portfolio even if someone tells you it's about to fall 10% due solely to market noise or in a kneejerk reaction to an offhand comment by a CEO during an earnings conference call.

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1Comment
Apr 12, 2012 8:36AM
avatar
I find it interesting that this article seems to indicate that Alcoa may have beat the analyst's expectations the company has a long way to go before it gets back to solid growth and profitability.  Yet, yesterday prior to this "revealing" article all the media hype was around how great Alcoa did and how they "saved the day" relative to the stock market and how the investors "cheered" the good news etc. and that's why the market was up 90 points.  Key question to ask about Alcoa is "How many tons of aluminim did they sell last quarter vs the previous one and where are they YTD vs their annual plan.  Any company can improve profitability by closing plants, laying off people etc. but real growth is when you sell more products and or services. 
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