(By R.Chandrasekaran) The world's biggest aluminum maker Alcoa (NYSE: AA) is set to kick start the much awaited earnings season on July 9. Investors and analysts are keenly watching the earnings season to rekindle interest in the stock market that has witnessed somewhat lukewarm or lackluster trading in the second quarter after a solid gain in the first quarter.
Traditionally, Alcoa sets the tone for earnings season sentiment. The company announced a profit for the first quarter surprising the market that was expecting a loss. This was partly due to Alcoa's focus on its midstream and downstream businesses besides cutting down costs on its upstream business.
The company earned 10 cents a share on revenues of $6.01 billion for the first quarter, whereas analysts were expecting the company to suffer a loss of 4 cents a share on revenues of $5.77 billion.
Just ahead of the fourth and first quarters, Alcoa announced a cut in its production plan to reduce supply for better price stabilization. However, this seems to have not paid dividends at least during the second quarter. This is because aluminum's price movement in the London Metal Exchange is not at all encouraging. Aluminum price in the cash market slipped to a little over $1800 mton at the end of June from a little less than $2100 mton in April. Most of the downside was witnessed in June.
Looking at the worldwide usage of Aluminum, Asia tops the list with over 40 percent of consumption, data from World Bureau of Metal Statistics indicated. This is followed by Europe with approximately 24 percent and the Americas with approximately 22 percent.
The catch is that Asian economy is slowing with China reporting lower growth, followed by India. China's market assumes significance as it was predicted to grow 12 percent in the current year. The saving grace is that Japan is growing following last year's recession. This could allow aluminum makers to realize better prices. However, this will not be enough to offset the sluggishness witnessed in the rest of the region.
With European Union also ruled out to contribute anything significant to offset weakness, Alcoa had to look towards the Americas. The transport sector helped. The automotive and aerospace sectors may offer hope to some extent, but this may again be insufficient to ward off any overall sluggishness in aluminum market due to over supply.
The hopes of the aluminum market turning brighter from the second quarter seem to have vanished. This is quite evident as Wall Street analysts' have reduced their earnings estimates on Alcoa by half to 6 cents a share for the second quarter from 12 cents a share three months back.
Revenue is predicted to be $5.83 billion, which is lower than the first quarter's $6.01 billion and last year second quarter's $6.58 billion. In the last four quarters, the company's earnings failed to meet consensus only once and met with expectations twice and topped once.
If the first quarter is an indication, Alcoa's product mix could help earnings bypass street expectations. Whether it can continue to drive in the remaining quarters, remains to be addressed by the company.
Based on July 4 stock price, shares of Alcoa dropped 4.4 percent after the first quarter results, while the S&P 500 edged up 1.14 percent during the same period suggesting underperformance of the stock. The aluminum industry is continued to reel under oversupply concern, and this is expected to remain a thorn in the third quarter too.