As investors and strategists try to wrap their heads around Alcoa's (AA) results today and recalibrate what they might mean for the broader markets, the global economy and even the rest of earnings season, the outsized impact that this undersized company is having can be summed up in two words: Chinese demand.
Yes, the company met per share earnings estimates of $0.06 that had come down 25% in the past few months. And yes, its revenues fell less than analysts expected, sliding just 1.5% to $5.89 billion. But the real engine revving the opportunism today is coming from an uptick in Alcoa's outlook that sees demand for aluminum rising 7% this year.
In a press release, the company highlights "global growth in the aerospace (9-10 percent), automotive (1-4 percent), commercial transportation (2-7 percent), packaging (2-3 percent), building and construction (4-5 percent), and industrial gas turbine (3-5 percent) markets" as the key drivers.
"If you look at some of the key themes we're keeping an eye on overall for this earnings season, Alcoa certainly touched on a couple of them," says John Butters, senior earnings analyst at FactSet, in the attached video. "One of them is the global economic story," he adds, pointing to the company's strong hopes for China being somewhat offset by continued weakness in Europe.
Reaction to the results had been positive but quickly lost steam, as broader market concerns persist. After initially pushing Alcoa shares to a four-month high, investors backed off, which is unsurprising given the fact that 65% of analysts who follow Alcoa currently rate it hold or sell. On a macro basis, traders have used the results to help repair a bullish bias that had been in retreat for the past few days — but even there doubts loom large.
Unfortunately, the correlation between the aluminum company's financial results and the ensuing earnings season is not perfect. According to FactSet data this is the fourth consecutive quarter that Alcoa has beaten EPS estimates, after missing four times in a row prior to that. Of the positive surprises, the stock and market have rallied twice, and fallen twice, making the broader context of the results more applicable than using them in isolation or as a litmus test.