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Earnings Stampede Rolls In with Alcoa; Does Soft Q2 Await?

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July 7, 2015
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Alcoa (AA) unofficially kicks off the next round of quarterly earnings reports after Wednesday’s closing bell. AA’s results matter for the industrial sector, sure. But the aluminum giant packs more for markets. AA’s report can be one proxy for the state of the global economy, currently under fire from Greece-tainted eurozone uncertainty and Chinese stock market volatility.

Heading into the upcoming earnings reporting season, broad stock market volatility is flaring. The CBOE Volatility Index (VIX), the market’s “fear gauge,” flirted with 19, and was nearing the closely watched 20 line, in recent sessions. That’s territory for VIX last seen in February (figure 1).

Earnings-Volatility-Rises

FIGURE 1: EARNINGS VOLATILITY IN VIX?

The CBOE Volatility Index (VIX) has climbed in recent sessions, nearing the closely watched “20” line. Greece uncertainty is driving sentiment but VIX’s flare up comes just as the broader market turns to earnings reporting season. Data source: CBOE. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

How’s Demand Look?

The metals and mining industry has had a year of challenges that included a strong dollar’s crimp on global profits. Firms have also struggled to match production capacity to softening global demand, especially as China’s growth slowed.

What’s more, U.S. industrial production and capacity utilization numbers have not jived with a big ramp-up in production, period. Still, auto sales numbers have perked up, aerospace, too, which could underpin AA’s demand predictions.

In April, Alcoa management forecasted global aluminum demand to expand 6.5% this year, off the 9% clip of 2014. I suspect that the stock market will hold Alcoa management to this message, desiring confirmation of or improvement upon that April call—this could be the biggest take-away of the report.

Tends to Beat

The 16 analysts surveyed by Thomson Reuters forecast AA’s Q2 earnings at a consensus $0.23 per share, pulled from a range of $0.20 to $0.27 per share. That’s down 18.6% from the previous quarter. But it is up from the $0.18 per share reported in Q2 a year earlier. AA has tended to beat the Street’s view over several of the past reporting periods, although share reaction to these beats was muted.

Industry analysts are looking for $5.81 billion in Q2 revenue, down slightly from the $5.82 billion Alcoa reported in this year’s Q1 and the $5.84 billion it reported a year ago.

Thomson Reuters analysts peg full-year AA EPS at $0.92 per share; some analysts have trimmed that view, citing lower 2015 aluminum price forecasts.

AA shares are off some 25% from where they stood a year ago; compare that to a 5.3% gain in the S&P 500 (SPX) over the past 12 months.