Alcoa results dent market confidence: analysts
SAN FRANCISCO (MarketWatch) -- While
Aluminum producer Alcoa, as the first of the 30 Dow Jones Industrial Average (DJIA) companies to report second-quarter results, is typically seen as a bellwether for other blue-chip companies.
Alcoa posted late Monday a $2 million second-quarter loss, or less than a penny a share. Excluding restructuring charges and other one-time items, the company earned 6 cents a share.
Although this was a penny a share better than analysts predicted, the report weighed on commodities prices Tuesday, according to Elvis Picardo, vice president of research and portfolio manager at Global Securities in Vancouver, B.C.
Alcoa also hit equities. The company was the biggest percentage decliner on the Dow industrials Tuesday, falling 4% to close at $8.40.
"The company is regarded as something of a barometer for the earnings season, but at this point, there seems to be too much negativity out there to offset a steady (rather than spectacular) earnings report from Alcoa," Picardo said.
"Investors are probably factoring in lower aluminum prices going forward, and that may be taking precedence over Alcoa's earnings report," he said.
But looking ahead some analysts remained optimistic. Acknowledging many risks remain -- such as China's role in the marketplace, volatile commodity prices and Alcoa's corporate performance -- analysts at Stifel Nicolaus & Company, Inc. held that the earnings weakness is a temporary phenomenon.
"[Weaknesses] will be resolved as additional global production cuts are implemented, which should lead to a recovery in aluminum prices toward the end of 2012," said Stifel analysts.
Production costs will probably be left unchanged going forward, said Citigroup analysts, but slowing growth rates in China and Russia, as well as a diminishing demand for new trucks, will weigh on sales.
The brightest business segment in Alcoa's future is aerospace, they said. Citi analysts forecast Alcoa's downstream profits to roughly double from 2010 to 2013.
Jefferies researchers held a more wary outlook, pointing to depressed aluminum prices alongside a strong dollar as downward catalysts on the aluminum maker.
"Unfortunately, we continue to believe the benefits of Alcoa's extensive cost-cutting efforts are flowing largely to customers and not shareholders," they said.
Analysts from DRCO agreed. While Alcoa has made strides internally, including its cost-cutting efforts, a challenging pricing environment and eventual outcome of litigation stemming from a bribery case in Bahrain will weigh more heavily on the company, they said.
But Alcoa's financial report was just the first of many. As more quarterly reports hit the market in the weeks ahead, investors should brace for a potentially choppy market, said Jim Strugger, strategist at MKM Partners.
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