Alcoa Earnings Preview

Here we go. The official start of earnings season begins with Alcoa AA reporting Q1 earnings after the bell on Monday.

The stock is the Punxsutawney Phil of the stock market. If Alcoa reports solid earnings, investors look forward to a positive earnings season. If it doesn’t, expect disappointment as companies announce.

Bloomberg points out that the statistics don’t support the Alcoa phenomenon. From 2002-2011, the S&P 500, rose 2.5 percent in quarters when Alcoa beat earnings but since 2011, the index has risen three percent when it disappointed investors.

Expectations

Alcoa will release earnings after the bell on Monday, April 8^th with a conference call from 5:00-6:00PM the same day. CEO Claus Kleinfeld is scheduled to appear on CNBC around 4PM following the earnings release.

The company is expected to report EPS of $0.08 cents with revenue of $5.88 billion. Last quarter, the company reported revenue of $5.9 billion and EPS of $0.06.

The Bear Case

Aluminum and natural gas tell the same story. Because production outpaces demand, prices are depressed and that is putting pressure on Alcoa. Kleinfeld expects China to produce 350,000 tons more than its consumption and globally, about 7.2 million tons are warehoused- an eight week supply.

The number of institutional investors is down 47 percent and in December, Moody’s indicated that Alcoa’s debt may soon have a junk rating.

The Bull Case

The company expects global demand for aluminum to increase seven percent in 2013 and China will account for 50 percent of the growth. Although China currently has a production surplus, that surplus will likely evaporate as demand increase.

Aluminum, like much of the materials sector, has a high barrier to entry making global competition small. Alcoa is in a strong position to capitalize on global demand as demand overtakes the supply. As the company’s management has increased margins and cut costs, the street has developed a favorable view of the company’s ability to weather the oversupply issues.

Technical Analysis

The chart supports a stock with a beta of more than two. A recent double top caused the stock to break down and fall below the lower trend line of a weak ascending channel. The stock is well below its 20, 50, and 200 day moving averages with volume increasing into earnings.

It has strong support at the $8.00 level and only about 4.5 percent off of its lows. The chart supports upside potential but a negative earnings report could send the stock plummeting.