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Here's Everything You Need To Know Before Today's Big Alcoa Earnings

Vincent Fernando, CFA
Oct 8, 2010, 5:54 AM

aluminium producer Alcoa (AA) reports its Q3 earnings after the close of trading today. The company’s results moved the markets last time it reported, back in July, when it hiked its global demand growth forecast for aluminium, a product used across a wide variety of industries ranging from autos to construction.

Here’s what to look for when the today’s numbers go public:

The key number: five cents. Alcoa is already expected to report a 29% lower net profit this quarter, so don’t be shocked by a decline in income. Analysts estimate just five to six cents of adjusted earnings per share (EPS) on average. The company is also expected to earn $0.46 for all of 2010, which means they need to guide for fourteen cents of EPS for Q4.

1) Margins are more important than revenue. Commodity prices are a function of input costs vs. demand, but what really matters for a producer is the spread they earn in the middle. Thus $50 of revenue with a $40 margin is better than $100 of revenue with a $10 margin. Given the volatile nature of commodity prices, margin performance (before currency effects and other non-operating items) will be a far more important indicator for Alcoa’s competitiveness than a higher or lower revenue figure than analysts expect. If someone says ‘Oh my gosh, a revenue miss!’ then they probably missed the point.

2) Currency effects. Alcoa’s earnings are highly vulnerable to the kind of currency swings we’ve seen lately against the U.S. dollar. The Australian dollar, Brazilian real, and the euro are all headwinds for earnings this quarter, so don’t be surprised if there are some hefty currency losses. However, aluminium prices have risen since July and could mitigate these effects. 3) The inventory glut. Global aluminium inventories are a major concern due to over-supply conditions in the market. We want to see Alcoa speak optimistically about them continuing to fall. 4) 12% global demand growth. Alcoa increased their 2010 global aluminium demand forecast to 12% from 10% last quarter. If they hold or increase this figure, it’s a sign that things are going as planned… which is pretty good given that 12% demand growth is already signals strong global demand of more than twice the 4.8% global GDP growth rate currently expected by the IMF. 5) Industry demand outlooks. We want Alcoa to at least maintain its previous view of its customers’ industries. They could provide colour across a range of industries shown below, with some doing better or worse. 6) Commodities. Many of the industries Alcoa feeds into are also consuming other commodities such as copper and steel. Thus it might be worth watching other related commodity players reaction to any potential Alcoa surprise.

7) But… there’s likely more room to disappoint than dazzle today. Alcoa has risen since its last report and even outperformed the S&P500, thus investors are going into today’s earnings pretty optimistic. 



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