My name is The Pragmatic Capitalist and I have an addiction. An addiction to companies with strong earnings. That is why I could care less about AA – Alcoa. AA officially kicks off earnings season today after the bell. It is a notoriously anticlimactic event, but looks like it could be a market mover due to investors’ fascination with the upcoming earnings season (which really doesn’t start until th
e middle of next week). Investors are very downbeat on Alcoa, but metals and mining has largely stabilized in the last few months.
New CEO Klaus Kleinfeld is certainly working to turn the company into a leaner meaner machine. The dividend cut alone will save the company more than $400 million a year. 15,000 job cuts doesn’t hurt either. Unfortunately, AA is at the heart of the economic and auto downturn. Aluminum prices have stabilized somewhat in early 2009 (almost entirely due to China), but weakness is likely to persist in AA’s broader businesses.
Figure 1 – Aluminum Prices
The earnings estimates look very modest based on my quick back of the napkin math, but AA’s earnings are very lumpy and often involve all sorts of fantastic accounting tricks. The company doesn’t give guidance, but don’t be shocked if they report better than expected numbers that goose the market. Either way, this is an event that is way overhyped and almost a non-factor in my mind….Don’t go running into AA just yet….
Update (4:30 PM EST) – The numbers are awful as expected. The revenues were better than expected and the earnings actually missed. The stock is getting a lift afterhours. Fortunately for AA shareholders, their management doesn’t give guidance. As I said before, I really don’t think AA matters at all. Dow futures have jumped about 40 points on the news, but don’t read too much into this. That is dumb money buying on this news. If Ben Bernanke farts tomorrow that gain will be unwound. The news out of Alcoa is not good news so don’t let CNBC or anyone else fool you into thinking that it matters at all. As for earnings, wake me up in the middle of next week when they actually matter.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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