The Brexit vote is behind us, the UK's selection of a new Prime Minister is still two months away, the US election is still four months away, the Italian banking crisis is simmering, but not boiling over (yet,) and yesterday's jobs report has put both the specter of recession and of interest rate hikes on the back burner, at least for now. So what's next? Why, earnings season, of course, and right on queue, Alcoa (NYSE: AA) is poised to kick it off after the close on Monday, July 11th.
Alcoa is one of the companies we closely follow, not just to understand the commodity landscape, but because their earnings calls typically provide an outstanding view of most industries in the industrial sector. They are heavily dependent, not just on commodity prices, but on the performance of major players in Aerospace, Transportation, Mining, Automotive, and a score of other industries that all contribute to orders of aluminum or aluminum based products. Getting a bead on Alcoa's outlook on the first day of earnings season provides a tremendous amount of insight into how the remainder of the season will go for most other industries.
This quarter's earnings call will be even more interesting, however, due to the impending split of Alcoa into two companies. We expect to hear more regarding the timing of the split and additional details as to the quarterly and annual outlook for the new company, named Arconic and trading under the symbol ARNC.
Since Arconic will be focused on the Aerospace and Automotive industries, ARNC will be added to our short list of quarterly earnings calls to study. Remember, there are a handful of key earnings calls that you should follow to give a broad overview of each sector and the market as a whole, and AA (as well as ARNC when they go public) are in that category.
So, what can we expect on Monday? Well, AA is traditionally pessimistic in their outlook, however this quarter they appear to have good reason to be. In the first quarter of 2016, AA experienced a significant drop in after tax operating income both in alumina (40% y/y drop) and primary metals (26% y/y drop.) Revenue year over year was down 15%, and you can expect those struggles to continue.
What's worse for AA, however, is that China - the world's leading supplier of aluminum - is gearing up to increase year-over-year production by 4%, and that increase is expected to begin in the second half of this year. According to Goldman Sachs, that will drive the overall commodity price of aluminum down from $1692 per metric ton as of yesterday's settlement price to as low as $1350 over the next twelve months.
The value-added business, however, is expected to see a boost, and it's that area in which we'll focus our attention since it will tell us the health of other industries. Sales to aerospace and automotives have been growing at a healthy pace and that is expected to continue with some reports looking at 5% to 8% growth in that division.
Overseas, expect the strength of the US Dollar - especially following the post-Brexit surge against the Euro and the British Pound - to produce negative headwinds for the remainder of the year. The strong dollar hurts exports and also hurts earnings exchanges as goods and services flow globally. Expect the impact of the strong dollar to be referenced in the reports of most companies in the S&P 500, as most have significant exposure overseas.
Towards the end of the week, we'll gain insight into the Financial sector when J.P. Morgan Chase (NYSE: JPM) reports before the bell on Thursday, however that's a topic for another post. Stay tuned.
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