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Alcoa’s ‘Bellwether’ Status: Does It Deserve It?

Christina Scolaro
Big Data Download

Alcoa (AA) “unofficially” kicks off earnings season after the bell today. Those earnings have become a bellwether for the rest of the U.S. stock market, but is that association warranted? We found that other than being the first of the Dow Jones Industrial Average to report earnings, there is little read-through to the rest of the market.

John Butters of FactSet Market Insight examined Alcoa’s earnings quarter-by-quarter for the past 10 years and compared results with each company in the S&P 500.

Research found that when Alcoa beat estimates, 74 percent of companies in the S&P 500 also beat estimates. However, research also showed, in the quarters Alcoa missed estimates, 73 percent of companies in the S&P 500 beat estimates anyway. Butters says, “while there is slight difference, it appears Alcoa earnings performance has little predictive value in determining the earnings performance of the remaining companies in the index.”

There is a little less clarity when comparing Alcoa and its’ effect on the price of the S&P 500.

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Recent history shows when Alcoa beat estimates, the price of the S&P 500 has increased about 80 percent of the time over the next three months. When Alcoa missed estimates, the price of the index has actually increased about 50 percent over the next three months.

Expected Earnings

Alcoa is seen posting earnings of 10 cents a share for the first quarter, less than the 13 cents Alcoa predicted 90 days earlier. The range of estimates is from 4 cents to 16 cents per share.

Sagging metal prices are expected to have kept profits down. Throughout the quarter, on the London Metal Exchange (LME), aluminum prices dropped close to 10 percent. Alcoa has also struggled as to keep up with diversified commodities companies such as BHP Billiton (BHP) and Glencore International (GLEN.L). Despite the challenges, the leading automakers reported positive sales reports in March, a sign that demand for raw materials such as aluminum remains strong.

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