Alcoa's earnings are coming: Brace yourself

Alcoa Inc. (AA) will kick off earnings season late Wednesday when it will be the first Dow component to deliver quarterly results. The aluminum giant's results have often been seen as an indicator to the state of the overall economy. Investors wonder what the implications will be if Alcoa posts a big loss and shows no uptick in demand. And with Wall Street bracing for yet another tough earnings season, Alcoa's report also are seen as a precursor for what's in store for corporate profits.

As it is, the profits of the S&P 500 index companies are expected to decline by 34 percent in the second quarter on a year-over-year basis, according to data compiled by S&P and Bloomberg. That's about the same as the 33 percent drop in the first quarter. Things start looking a little better in the third quarter, when profits are expected to fall "only" 21 percent and profits may actually rise in the fourth quarter which, would look downright terrific especially when compared to the dismal fourth quarter of 2008. Investors' nervousness ahead of the earnings season is understandable then, and Alcoa bares the burden of being first. Fitting, with its AA ticker symbol.

By the numbers, Alcoa is expected to report a second quarter loss of 34 cents per share, according to First Call, or 32 cents per share according to Reuters estimates. While it is a narrower loss than its first quarter loss of 60 cents per share, it's still a far cry from its 66 cents per share profit in the same period last year.

Meanwhile, aluminum prices remain low. Despite climbing 17 percent in the second quarter, spot aluminum prices are about half as much as they were a year ago as demand has declined significantly and remains under pressure in the current global economic environment. This isn't boding well for Alcoa's current quarter either.

Even if Alcoa reported a recent uptick in orders, the lower aluminum prices would continue to put considerable pressure on its earnings going forward. Many analysts also believe any potential demand increase would be more indicative of companies restocking while aluminum prices are low after allowing their inventories to go down in recent months. Not only that, with its announced production cuts, at current capacity, it is hard for Alcoa to absorb its fixed costs.

Judging from the stock's performance Monday, it seems investors were trying to get out ahead of the report. Alcoa's stock closed down about six percent, re-testing the $9 level. The stock hit a 52-week low of $4.97 in early March, but more than doubled since then to trade at over $12 per share in June. Still far off, though, from its 52-week high is $35.66 from a year ago.

But do Alcoa's results really provide an indication about the health of the overall economy? That's the debate that seems to be raging on today. Some think that Alcoa's results will indicate what is already common knowledge, not what's to come. They believe that Alcoa's forward-looking statements will not reflect on the health of the overall economy, but just give a good indication about the health of the aluminum industry. Others, though, think that since most of the company's end products are used in areas that are integral parts of our lives, its results are a good indicator of current economic activity. Regardless, it will be interesting to hear what Alcoa has to say Wednesday as it kicks off the earnings season.

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