Alcoa Kicks Off an Uneasy Earnings Season

The aluminum giant is set to announce results Tuesday as investors look for signs that sagging corporate profits could point to a U.S. slowdown

With Alcoa's (AA) earnings report on Tuesday, corporate America will start filling in the blanks on one of the most uncertain quarters in years.

Alcoa, which traditionally goes first each earnings' season, starts the rush of firms reporting their July through September sales and profits.

For some market participants, the aluminum giant is a bellwether — an early sign of third-quarter trends. Alcoa investors, however, may be watching the announcement more for details about Alcoa's new strategy than for clues about the broader economy.

Just before earnings' season, the market usually has a pretty good idea how corporate earnings will turn out, says Ashwani Kaul, an analyst who monitors corporate earnings for Reuters Estimates.

This quarter, "You don't know where you stand," Kaul says. The number of corporate profit previews is down 20%, indicating companies feel too uncertain to give investors early clues.

Alcoa's earnings, despite their high visibility, usually have little impact on the broader economy unless they widely miss or beat estimates. But this quarter, Kaul expects the market to look for clues in Alcoa's report.

It's a key time for the U.S. economy, as it is threatened by the summer's market turmoil and the decline of the housing sector. Alcoa sells a lot of aluminum to U.S. home builders, and it is exposed to other broad swaths of the economy, including durable goods and the troubled auto makers.

Standard & Poor's equity analyst Leo Larkin, however, doubts Alcoa is much of a bellwether. For one thing, the price of aluminum is set worldwide, and heavy overseas demand for the metal can easily offset any weakness in the U.S.

Also, Larkin says he and other Alcoa-watchers will be far more interested in getting news on Alcoa's restructuring.

"Alcoa has disappointed investors for many years," Larkin says, so the restructuring is considered very important. "This is a company that's under the gun to get their profits up," he says.

The company has announced a series of steps to boost its profits and cash flow: It's selling its packaging and automotive castings units; it's re-structuring its electrical businesses; and Alcoa sold off a $2 billion stake in a Chinese aluminum company.

The effect of these moves should be to widen profit margins and generate a lot of cash, S&P's Larkin says. Alcoa's earnings call should provide clues as to where this money will go: Share buybacks? A higher dividend? Acquisitions? A conference call with Alcoa execs may provide some answers.

(Standard & Poor's, like BusinessWeek, is a unit of the McGraw-Hill Companies.)

Analysts are expecting Alcoa to report earnings of 66 cents per share, up from 62 cents a year ago, and revenues of $7.3 billion in the third quarter.

In the last few months, Alcoa shares have fluctuated widely as investors reacted to news and rumors about acquisitions in the aluminum industry. Shares skyrocketed in mid-July when it was reported that BHP Billiton (BHP) may make a bid for Alcoa. The stock hit $48.77 per share, a 52-week high, but then fell again when BHP said it wasn't interested. Alcoa shares started the week trading at $38.51 per share.

Analysts are expecting a mediocre quarter for corporate earnings. Reuters Estimates, which compiles the estimates, says earnings of the S&P 500 are expected to rise 3.2%. A year ago, corporate profits were up 21.1%.

Four sectors — basic materials, cyclical consumer, energy and financial — are expected to see earnings fall.

Often analysts underestimate earnings growth, but Kaul says he doesn't expect earnings to grow more than 5% this quarter.

Better times may be coming soon, however. Reuters Estimates says profits should heat up in the fourth quarter and early next year, hitting double-digit growth rates for the first time since 2006.

That's assuming, however, that corporate profits can survive this rough patch, and the economy can avoid a slowdown or recession. Thus, Alcoa's earnings report will be just the first of hundreds scrutinized by investors for signs of weakness.

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