Earnings Season Looms With Alcoa on Deck

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Alcoa (NYSE: AA  ) has long marked the unofficial kickoff of the earnings season as the first Dow component to report each quarter. The company is scheduled to release numbers tomorrow, and it may well set the tone for the materials sector, the index, and the overall market. In the broader market, a Bloomberg survey suggests that earnings for S&P 500 companies are expected to contract for the first time since 2009. Alcoa has some strong fundamental metrics heading into the release, but with weak sentiment for the market, and specifically for aluminum prices, caution is warranted.

The market backdrop
Johanna Bennett of Barron's recently explained the role of the upcoming earnings season on the overall tenor of the market, and the tone that Alcoa may set:

Many strategists argue that as a stock market catalyst, earnings have taken a back seat to the accommodative Federal Reserve. But eventually, earnings will resume their role as the engine driving the stock market. And that engine needs some gas.

This remark comes even as Monsanto (NYSE: MON  ) beat on both the top and bottom lines and upped its outlook for the year; the company reported earnings of $2.73 per share against expectations of $2.58. Furthermore, the company's heightened expectations, if met, would mark the third consecutive year in which the seed giant achieves growth above 20%. In the shadow of such a report, you can see how important Alcoa can be as an indicator.

Alcoa's expected results
Heading into Monday's release, the consensus EPS for Alcoa looks to be $0.11 on revenues of $5.97 billion. Referring back to the company's most recent earnings release, we see that Alcoa is expecting solid earnings growth for 2013 in the range of 9% to 10%. The bulk of this growth is driven by China, which recently saw a 4.5% increase in the construction sub-index of Chinese PMI. That's is a carry-through of the $150 billion in government-approved expansion projects to combat slowing GDP growth.

China is of particular importance, given that Alcoa's own projections have it accounting for 23% of global consumption. Chinese demand will, therefore, be of particular significance and may serve as a critical indicator for investors. Any dramatic shifts in government policy relating to those critical expansion projects should be seen as a central risk factor or price driver.

Outlook and risk factors
While the company specifics are certainly of importance, drivers of the broad market may have a greater short-term impact on the stock. Earlier this week, the VIX -- the market's unofficial fear index -- jumped 11%; year-to-date the VIX is down roughly 21%. As the Dow continues to dance with new record highs, a significant market correction is likely to be the most significant risk factor at present.

You should also pay careful attention to the company's guidance. Not only will this affect the stock, but it could also have an impact on the market as a whole. When Nucor (NYSE: NUE  ) and U.S. Steel (NYSE: X  ) report later in April, each is likely to be affected by the tone set on Monday. While Nucor has been somewhat resilient -- probably driven in part by its 3.2% dividend yield -- the tone will certainly be critical for U.S. Steel, which, like Alcoa, is trading near its 52-week low.

Overall, as is typically the case, Alcoa's earnings may well prove to have effects beyond the company itself.

Materials industries are traditionally known for their high barriers to entry, and the aluminum industry is no exception. Controlling about 15% of global production in this highly consolidated industry, Alcoa is in prime position to take advantage of growth that some expect will lead to total industry revenue approaching $160 billion by 2017. Based on this prospect and several other company-specific factors, Alcoa is certainly worth a closer look. For a Foolish investment perspective on this global giant simply click here now to get started.

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9/28/2016 12:54 PM
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