Schaeffer's Trading Floor Blog

Why is Alcoa Down After Topping Earnings Estimates?

Schaeffer's Senior Equities Analyst examines AA’s turn in the earnings spotlight

by 10/10/2012 10:21 AM
Stocks quoted in this article:

The 2013 third-quarter earnings season is (un)officially underway, as Alcoa Inc. (NYSE:AA) released their earnings last night. But the stock is reacting negatively, despite the company's beat on earnings and revenue estimates. Why the lackluster response? It seems that investors certainly didn't like the fact that AA lowered its 2012 global aluminum demand growth forecast from 7% to 6%. But there also may be a contrarian explanation behind this negative reaction.

Ahead of the report, it's interesting to note that option traders were very bullish on the security. During the past 10 days on the three major exchanges -- the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- more than two times as many calls than puts were bought (to open). In fact, going out 50 days, traders had picked up 1.75 calls for every put that crossed the tape.

At the close yesterday, the near-the-money (9-strike), weekly AA straddle was offered at $0.48 ($0.17 for the 9-strike put, $0.31 for the 9-strike call). This implied a 5.3% move (in either direction) in AA shares through this Friday's close. In mid-morning trading, AA shares are down 3.1%.

In addition, analysts on Wall Street have remained surprisingly upbeat on this stock even though it is has underperformed the broad market and is sitting on an 11.4% year-over-year deficit. For example, only three of the 15 analysts following the aluminum giant recommend selling it. Furthermore, the average 12-month price target sits at $10.66, which is a 16.8% premium to Monday's closing price of $9.13. This type of optimism generally sets a higher bar for a stock and this certainly was the case with AA.

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