Market Overview

Earnings: Alcoa Forecast To Falter Ahead Of Company Split; Q2 Anyone?

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Let the games begin. Alcoa Inc (NYSE: AA) turns in Q1 results after the bell today to mark the official onset of earnings season—that four-times-a-year period when investors get to look under the hood and kick the tires of their stock holdings. By most analyst forecasts, the expectations for profit gains cumulatively among the companies that comprise the S&P 500 index (SPX) are not only sloping downward but could be the worse overall results since 2008. But enough about Q1 already, what are they doing for us in Q2?

Grim Expectations for S&P Profits

The projections for Q1 have been trending downhill for many weeks and sit at a negative-7.4%, compared with the year-ago period, according to Thomson Reuters. Analysts blame such a drop mostly on the energy sector, which has been decimated with the steep declines in oil prices coupled with the rising value of the dollar. But Wall Street should be used to this kind of slump considering that, if predictions are on target, it will be the third straight quarterly profit descent.

Check out more on this thesis, here.

Analysts will be looking for some insight into what’s ahead based on what’s already happened so far in the Q2. Any sort of positive, forward-looking statements on conference calls by CEO’s will probably be well received by the markets.

Though the forecasts are grim, analysts note that they could turn out to be less catastrophic than expected, given how companies like the “beat-the-Street” headlines when they outperform expectations. We’ve seen a lot of that in previous quarters as well as in the handful of companies that have already turned in earnings.

AA’s Unpredictable Results

Whether we will see it in AA is still unpredictable, given their track record. In the last two quarters, AA missed expectations but outpaced them in the five quarters before those. The aluminum maker, which is in the process of splitting off what it calls its “value-added businesses” from its “upstream businesses,” is expected to deliver a per-share profit of $0.03 on sales of $5.13 billion, according to the average reached by analysts reporting to Thomson Reuters. That’s a white-knuckled 89% profit plunge from the same period a year ago amid a 12% drop in sales.

Analysts say they will be listening on the conference call for an update on the split of the traditional smelting business from the multi-alloy manufactured goods for the aerospace and automotive sectors, which will be called Arconic. They’re also interested in whether AA’s projections in January for a 6% increase in global aluminum demand are on track.

Short-term options traders have priced in a potential 8% share price move in either direction around the earnings release, according to the Market Maker Move indicator in the thinkorswim® platform by TD Ameritrade.

Going into earnings the April 9-strike put sellers were active as were the April 11-strike call sellers. The implied volatility is at the 65th percentile, buttressed by twice the normal number of calls and puts. (Please remember past performance is no guarantee of future results.)

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price and over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.


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