Indicator of the Week: Alcoa Inc. Kicks Off Third-Quarter Earnings Season By Rocky White, Senior Quantitative Analyst
Foreword: Each earnings season, Alcoa Inc. (AA) is one of the first major companies to report. Last Wednesday, AA reported a profit of 4 cents per share, faring far better than the 9-cent loss many analysts were expecting. But Wall Street had seen this act before in the second quarter, with earnings topping consensus views largely due to heavy cost-cutting instead of top-line revenue growth. Continued cost-cutting is obviously not sustainable over the long term, and analysts' chief concern about the upcoming earnings season is whether that top-line growth will return. But AA's quarterly report flew in the face of this skepticism, as revenue growth, not cost-cutting, was the major factor in the company's earnings report.
Specifically, AA reported that revenue grew by 9% for the quarter, easily topping analyst estimates. Consequently, Alcoa saw a very positive reaction on Thursday with AA shares gaining more than a percentage point. Does this tell us anything about what to expect for the rest of earnings season? Is it setting up a series of positive surprises or are we just getting our hopes up so that the rest of earnings season will likely disappoint? I looked back over the last five years of earnings reports to see what Alcoa's positive earnings could tell us about the next few months.
The Past Five Years: The following tables detail the S&P 500 Index's (SPX) returns following Alcoa's earnings reports for the past five years. I broke down the returns depending on whether AA had a positive earnings reaction or a negative earnings reaction. As you can see from the tables below, a positive reaction to AA's earnings is very bullish for the SPX, compared to the index's returns in the wake of a negative reaction. In other words, based on last week's AA earnings reaction, we should be pretty excited about the market moving forward, at least until the fourth-quarter earnings season begins.
Digging into the data, let's take a closer look at the one-month return, as it places the SPX in the heart of earnings season. When there is a positive reaction to AA's earnings, the market returns a very impressive 2.35% during the ensuing month. Only two of the eight such signals detailed below show a declining market for this period. Comparatively, a negative reaction to Alcoa's earnings results in an average market return of 0.34%, with positive returns following seven of the 12 signals.
The Past 20 Returns: In the table below, I show the past 20 earning reactions for Alcoa and the ensuing SPX returns. Note that the pattern mentioned above did not hold true following the prior reporting period, as reactions to AA's earnings report were negative, yet the SPX still put together an impressive return. Also, I notice that the most recent report marked only the second time in the past seven earnings releases that AA had a positive reaction.
Implications: Alcoa's positive reaction has been a good omen in the past, signaling very bullish returns in the following months. Just like last earnings season, we see a lot of negative sentiment heading into these third-quarter reports. With expectations this low, we see more potential for a surprise to the upside rather than the downside. Alcoa's big surprise profit only strengthens our conviction that more positive earnings results can cause a major unwinding of the negative sentiment and propel this market higher. The past two earning seasons saw major double-digit market gains within a month (see the table above). We still see the negative sentiment; all we need is a few more surprises. I would recommend being positioned to take advantage of this.
This Week's Key Events: Fed Minutes and Consumer Price Index on Tap By Joseph Hargett, Senior Equities Analyst
Here is a brief list of some of the key events for the upcoming week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective Web site for official reporting dates.
Monday
There are no economic reports slated for release on Monday. On the earnings front, Fastenal Company (FAST) is scheduled to release its quarterly report.
Tuesday
The economic calendar is devoid of reports for a second consecutive day on Tuesday. Elsewhere, Johnson & Johnson (JNJ), Altera Corp. (ALTR), CSX Corp. (CSX), and Intel Corp. (INTC) are among those reporting earnings.
Wednesday
September's import/export prices, retail sales, and August's business inventories will be joined by minutes from the most recent Federal Open Market Committee meeting on Wednesday. Meanwhile, Abbott Laboratories (ABT), JPMorgan Chase & Co. (JPM), and Xilinx Inc. (XLNX) are scheduled to report earnings.
Thursday
Weekly initial jobless claims, the consumer price index (CPI), the core CPI, weekly U.S. petroleum supplies, and the Philadelphia Fed's manufacturing index for October will arrive on Thursday. The earnings calendar includes Citigroup Inc. (C), Cypress Semiconductor Corp. (CY), Fairchild Semiconductor International (FCS), Goldman Sachs Group Inc. (GS), Harley-Davidson Inc. (HOG), Nokia Corp. (NOK), Southwest Airlines Co. (LUV), Advanced Micro Devices Inc. (AMD), Google Inc. (GOOG), and IBM Corp. (IBM).
Friday
We round out the week's economic calendar with September capacity utilization and industrial production reports, as well as the preliminary University of Michigan consumer sentiment index for October. Reports from Bank of America Corp. (BAC), General Electric Co. (GE), Halliburton Co. (HAL), and Mattel Inc. (MAT) are scheduled for release.
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