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Earnings Season Kicks Off With Industrial Alcoa (AA) Monday

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July 11, 2016
Stock market analysts discuss Alcoa earnings report.

Alcoa (AA) kicks off the unofficial start of earnings season after the bell Monday. And while company results are always important, some analysts might be more interested in what chief executives at AA have to say about the future. For instance, what are the company’s projections for the next quarter and beyond?

Do they expect the economy to slow or pick up? And for multinational corporations, how might Brexit impact operations? How is the strong dollar impacting them now?

S&P 500 companies are on track to hit the one-year mark of shrinking profits, according to S&P Global Market Intelligence, with a 5.1% decline from year-ago earnings. That’s right, generally large companies appear to be in a profit recession. The good news is that, if the estimates for this quarter are accurate, it could represent an improvement from the first quarter’s 6.8% decline in earnings. “If the sequential improvement in growth holds up as earnings season unfolds, that could mean that Q1 was in fact the trough in the earnings recession,” says S&P Global’s Lindsey Bell, senior analyst.

The energy sector is pegged again as the worst performing with a projected 81% drop in profits, which have sunk with the plunge in oil prices. But S&P Global also sees profits lagging in five other sectors, with materials and financials nose-to-nose at 7.8% declines. Technology stocks are forecasted to report profits 5.3% lower, consumer staples down 3.7%, and telecom falling 2.6%.

Consumer discretionary companies are expected to see profits jump 9.6% and industrials higher by 7.9%. Utilities and healthcare are also seen gaining, at 3.3% and 3%, respectively. The industrials sector is new to the list of top three growth leaders, S&P Global says, while healthcare has fallen out of the top three for the first time since Q2 2014, when it was posting double-digit gains until Q1. The biotechnology slowdown is expected to leave healthcare profits at a 3% increase compared with its 8% gain in Q1.

As for AA, it’s a small-capitalization stock that seems to have lost its premier stature in the markets, but still holds the baton as marshal of the earnings parade. AA is in the sagging materials sector and has underperformed the S&P for most of the year and expectations aren’t exactly rocking for AA.

But it’s splitting its so-called upstream products, the assets of the company tied to aluminum prices that will keep the Alcoa name while the faster growing aerospace and automotive units will become Arconic, trading under the ticker ARNC sometime in the second half of the year. Some analysts say they will be listening for more information on when and how the split will take place.

In the meantime, many analysts surveyed by Thomson Reuters are looking for AA to report per-share earnings of $0.09 on topline sales of $5.18 billion. A year ago, AA turned in a profit of $0.19 a share on revenues of $5.9 billion. The results missed analyst expectations, but AA typically has outpaced expectations and has for the past two quarters.

Short-term options traders have priced in a potential 7.3% share price move in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim® platform by TD Ameritrade.

Ahead of earnings, puts and calls were trading in a tight range, with some traders active in the 9.5-strike calls and the 10-strike puts. The implied volatility is at the 41st percentile. (Please remember past performance is no guarantee of future results.)

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

FIGURE 1: ALCOA (AA) TRADES IN A TIGHT RANGE.

AA has been holding in a tight range between about $9 and $10 for the last two months. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

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