Tuesday, April 9, 2013
A minor cottage industry of sorts springs into action around this time every quarter to prove that Alcoa’s (AA) results tell us something about how other companies’ results will be in the earnings season. Take all of those comments with a spoonful of salt. Yes, demand for aluminum products now comes from a variety of industries like automotives and aerospace and other. But to claim that Alcoa’s fortunes carry any relevance beyond the mining or even basic materials space is simply misleading.
As such, Alcoa’s strong earnings beat after the close yesterday is relevant only to itself and its own industry – it doesn’t tell us much beyond that. If anything, the earnings reports from FedEx (FDX) and Oracle (ORCL) that came out before Alcoa carry a lot more informational value about broader earnings picture.
So what should we be looking for this earnings season?
Expectations for Q1 remain low. Total earnings are expected to be down -2.6% from the same period last year. Tough comparisons and weak guidance account for the mediocre growth expectations (2012 Q1 produced the highest quarterly earnings total since the current earnings cycle started in 2009). But since roughly two-thirds of the companies typically beat expectations in a typical quarter, the final earnings growth tall will likely be better than current expectations. My sense is that if Q1 is like any other quarter, then we will see a growth rate close to the flat line – meaning essentially no growth.
What would matter much more than the proportion and level of ‘beats’ will be guidance. And the reason for that is that expectations for the coming quarters, particularly the second half of the year, remain high. Current consensus expectations are for total earnings to be up +2.3% in the second quarter and up +10.9% in the second half of the year. Guidance will determine whether those expectations will hold up or not. My sense is that they wouldn’t hold up and estimates for Q2 will start coming down as the Q1 earnings season gets into high gear.
With economic data already showing signs of renewed weakness, it will be hard for the market to hold its ground in such an earnings background. This is pointing to tougher times for the market in the Spring/Summer day.
Director of Research
Tuesday, April 9, 2013