Alcoa surprises Wall Street with first-quarter profit

Alcoa Surges Past Estimates
After the bell on Tuesday, Alcoa (AA) released operational results for its first quarter of fiscal year 2012 that surpassed the Street's estimates on both the top and bottom lines. Management indicated that rebounds in the automotive and airplane manufacturing helped boost the results. Alcoa reported a record revenue figure of $6.0 billion (above the Street's $5.77 billion forecast) and earnings, excluding items, of $0.10 per share (above the Street's forecast of a $0.04 loss per share). Last year during the first quarter Alcoa reported earnings of $0.27 per share.

Growth at the company was driven by a surge in its Engineered Products and Solutions unit, which jumped 11%. Process improvements contributed to that gain, and Alcoa is expected to see further market share gains in the second quarter. However, in what could be construed as a negative, the company reaffirmed its demand projections for 2012, seeing aluminum growth of 7%, even as it said growth in the aerospace industry would outpace previous estimates. Elsewhere around the world, Alcoa projects China consumption to gain 11% after surging 15% during 2011. Management indicated it projects mid-single digit consumption growth in both Russia and Brazil, while Europe contracts 0.3%. I expected growth in China to slow as well as Europe to show more of a contraction.

The beat has a bittersweet feeling to it as the Street's forecasts have been in free-fall mode since November of 2011. According to Thomson/Reuters, estimates were for earnings of $0.20 per share in November, then $0.12 per share in December before falling to a loss of $0.04 per share by January. The Company capped its alumina production earlier this year, and there continues to be an oversupply in the marketplace, something that slightly higher demand from the auto and air business is not going to replace. Additionally, pricing power continues to be a problem as management indicated that the Company realized a 9% drop in aluminum prices during the quarter.

I had modeled for revenues to rise to $5.81 billion with a loss of $0.06 per share. Alcoa reported a much stronger rebound in the Engineered Products segment, which helped to offset the higher cost of goods and lower aluminum prices. The stock is up approximately 5% in the aftermarket, but is still down dramatically from this time last year (almost $18). I am not taking the bait; I would still avoid the stock, but if you are stuck in the stock, this looks like a great opportunity to take advantage of the positive news and sell while you can.

WALL STREET >>> Critical Earnings Season Begins Tomorrow with Alcoa

A strong round of corporate earnings could help to offset last Friday's jobs disappointment

 

Alcoa (AA) kicks off first-quarter earnings for 2012 after tomorrow night's close. Historically, Alcoa's report has been very predictive for both corporate earnings and the subsequent price action within the equity market. While some say that too much emphasis is placed upon AA's actual report, it is undeniable that major corporate earnings numbers will have a huge impact upon the market's price action going forward.

 

Since the end of 2011, analysts' earnings estimates have been revised dramatically higher. Lowered expectations have given way to an increasing level of optimism, both on the macro and micro fronts. This could be a function of the increasingly positive economic data that has surfaced over the past few months. Of all the sectors within the market, financials have seen the most drastic upward revisions (currently at their highest level since 2008). Since the market bottom in March 2009, bears have held onto the mantra that the market cannot rally without participation from financials. Up until the beginning of this year, the bounce in financial stocks had been fairly modest, especially given the dramatic sell-off that they experienced during the crisis of 2008.

However, the Financial Select Sector SPDR Fund (XLF) is up dramatically this year, outpacing the S&P 500 Index (SPX) by over 7%. Since these stocks are now performing strongly, could continued outperformance by financials be the next catalyst to take us even higher?

Historically, upward earnings revisions have preceded very strong periods within equity markets, as evidenced by the accompanying Bespoke data (above charts). After last Friday's disappointing jobs number, a strong earnings season could be just what the doctor ordered to cause sideline money to come back into the market, driving it to new highs. All eyes will surely be on the upcoming data, which is now of paramount importance given the recently heightened expectations. 

Bottomline

Pre-market Dow Futures give a good indication of market traders expectations towards upcoming season's corporate financial reports.