Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Earnings Season Kickoff: What Alcoa’s
Saying About the Market and More

Thursday, April 12th, 2012
By for Profit Confidential

earnings seasonAlcoa, Inc. (NYSE/AA) is traditionally the first Dow Jones Industrials stock to report in earnings season. The company is one of the world’s top aluminum makers and hence is a good indicator for the global economies, as the metal is used in many industrial applications, including aircraft, automobiles, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial.

Alcoa surprised on the upside and raised its global revenue guidance to seven percent for 2012, which suggests the global economies may be better off than previously thought.

But again, Alcoa is only one company; there are 499 S&P 500 companies to come in this earnings season. You should monitor the results from the sellers of luxury goods, which are faring well, as I discussed in Retail Sector Stars: Luxury Stocks Are in Vogue.

The news doesn’t look promising for the first-quarter earnings season, but this could change as it did in the fourth-quarter earnings season as we moved along.

Based on the current estimates, earnings growth is estimated to be 3.2% in the first quarter, following 9.2% growth in the fourth quarter, according to Thomson Reuters. The first-quarter reading tends to be low, but it should move higher as earnings are reported. Earnings growth in the second quarter is estimated at 9.2%.

The two top-performing earnings expected for the first-quarter earnings season are Industrial’s (+10.3%) and Financials (+8.3%). Technology (+16.8%) was the second top gainer in the fourth-quarter earnings season. I still believe technology will remain one of the top areas to make money going forward.

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The two weakest areas of earnings growth in the first-quarter earnings season are expected to be similar to the fourth-quarter earnings season, with Telecom (-14.1%) and Materials (-15.6%) representing the losers.

As in the past quarters, the key in my view is whether companies are growing their revenues to drive earnings or the earnings growth is being generated by cost cuts. This is critical and could give us a good indication of how well corporate America is actually doing.

The reality is that many companies cut costs during the recession and should be in better condition now. If the economy were truly healthy, we would see earnings growth driven by revenues. In addition, what the company says about the future is important. Alcoa was upbeat going forward. The area to keep an eye on according to Alcoa is the aerospace sector, where the global demand for aluminum is pegged at 13% to 14%, up three percent. The other areas of growth include automotive (three percent to seven percent), commercial transportation (one percent to five percent), packaging (two percent to three percent), building and construction (2.5% to 3.5%), and industrial gas turbine (one percent to two percent).

The key is to monitor the companies that are global in nature, especially those that produce the raw materials essential to economic renewal, such as copper, energy, iron, forestry and concrete.

As I have said, the key will be revenues going forward, especially organic growth. We want to see revenues grow to drive earnings instead of cost cuts. Without revenues growing, it is difficult to imagine a healthy U.S. economy and I’m concerned this could hamper growth.

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  • Murat

    the truth is always wlleufoy unreported in the USA propaganda machine. As one of the first people to report on MTBE, a gas additive, I found AP press articles that had false headlines, and totally fabricated quotes in the articles!All to support big oil's position that MTBE was safe. And don't forget the massive lies that brought us to the war in Iraq.

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George Leong - Financial Planner, ConsultantGeorge Leong, B. Comm. is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services. Add George Leong to your Google+ circles