Aluminum giant Alcoa (AA) typically gets the credit for kick-starting the earnings season even though its earnings release after the close on Wednesday April 8th wouldn’t technically be the first this reporting cycle (or any earnings season for that matter). We already have Q1 reports from 20 S&P 500 members, with many of them like FedEx (FDX – Snapshot Report), Nike (NKE), Costco (COST) and other real bellwethers in their respective spaces and far more representative of the U.S. economy and Corporate America.
We should be mindful, however, that all of these early reporters have been releasing results for their fiscal quarters ending in February, which gets counted as part of the Q1 tally. In fairness to the aluminum giant, they are the first S&P 500 member on the calendar quarter to release results this week. Alcoa’s earnings report isn’t totally irrelevant to the broader earnings season either, particularly since the company’s operations have become more downstream oriented and the automotive and aerospace industries have steadily become major end-markets.
Alcoa is expected to earn 25 cents this quarter, down 4 cents since early January, but up materially from the 9 cents it earned in the year-earlier quarter. The strong growth this quarter is a function of higher aluminum price realizations and the absence of some of the issues that held down year-earlier profitability. But more important than earnings growth, market participants will be looking for management’s commentary about the state of global aluminum demand, which will be seen as a proxy for the health of the global economy.
Sharp Revisions to Q1 Estimates
Unlike the 4-cent negative revision to the Q1 Zacks Consensus EPS estimate for Alcoa over the last three months (from $0.29 to $0.25), estimates for the S&P 500 index came down far more sharply in that time period. Negative revisions to Q1 estimates were hardly unusual – this has been the trend for quite some time and has become particularly notable over the last couple of years as management teams have been consistently providing weak guidance.
One could cite a variety of reasons for why this has been the norm lately, but the most logical though cynical explanation is that management teams have a big incentive to manage expectations. After all, it pays to under-promise and over-deliver.
The chart below shows this trend clearly. The dark green columns show the earnings growth expected at the start of each quarter; the orange column shows the growth rate expected by the time the earnings season gets underway and the shaded green column shows the actual growth achieved that quarter. For 2015 Q1, we started at +4% in early January, which has effectively flipped by now. But if history is any guide, then the actual growth rate will likely be in the vicinity of where we started out in January. Other than 2014 Q4, this has been the pattern repeatedly in recent quarters. Â
Keep in mind however that while the trend of negative revisions is no different from other recent periods, the magnitude of negative revisions for 2015 Q1 exceeds any other recent quarter by a big margin.
The chart below shows the magnitude of negative revisions for each quarter since 2013 Q2. As you can see, 2015 Q1 estimates have fallen -8% since January 1st, the most of any other recent quarter in the comparable period. Please note that the ‘average’ represents the average for the 7-quarter period through 2014 Q4.
Chart 1: The Magnitude of 2015 Q1 Earnings Revisions Compared
