While it feels like we just finished earnings season, we’re already gearing up for another one! As you may know, Alcoa Inc. (AA) is always the first to report earnings, and it managed to beat expectations with last night’s second-quarter report. As I write this, AA shares are rising nearly 5% after the aluminum producer posted a 50% earnings surprise and a 2% sales surprise.
However, that’s not to say that Alcoa had blowout results. In fact, compared with the year ago quarter, earnings shrank 3.6% and sales fell 10%.
The fact is that the strong U.S. Dollar has been crushing Alcoa’s sales and earnings. First, nearly half of Alcoa’s sales originate from outside of the U.S. With many of the world’s major currencies at multi-year lows against the dollar, Alcoa’s international sales are weakened. Second, because there is an inverse relationship between commodities and the dollar, this has hurt Alcoa’s aluminum sales.
Now, aluminum prices have been on the rebound lately, and that’s due to increasing demand. However, Alcoa expects the aluminum supply to climb 2.5% in 2016, which will shrink the deficit between demand and supply.
So, Alcoa has an uphill battle ahead of it. Analysts expect Alcoa’s sales to continue to fall for the next three quarters. And while Alcoa is expected to post double-digit earnings growth next quarter, that’s because the year ago results were so bad.
If you look at Alcoa Inc.’s Stock Report page in Portfolio Grader, you’ll see that AA has been struggling for quite some time. Alcoa fails on six of eight fundamental metrics: Sales Growth (F), Operating Margin Growth (F), Earnings Growth (F), Earnings Momentum (D), Cash Flow (D) and Return on Equity (D). The stock receives a D for its Fundamental Grade and a C for its Quantitative Grade.
Keeping this in mind, I do not recommend AA for new money. If you currently own shares, you can continue holding them; I’d look for an opportunity to sell them into strength.
While Alcoa was the first to report negative sales and earnings, it won’t be the last. According to FactSet, the S&P 500 is expected to post a 5.6% earnings decline and a 0.7% sales decline for the second quarter. That would mark the fifth straight quarter of earnings declines and the sixth straight quarter of sales declines.
In this type of environment, stock selection is critical. Making certain that you hold companies with the right sort of fundamentals—positive earnings revisions and surprises, increasing sales numbers, expanding operating margins, free cash flow, earnings growth, earnings momentum and return on equity—is the first step in making certain that your portfolio will be able to thrive this summer. So before you buy any stock, you should always run it through my free Portfolio Grader ratings system.
In the meantime, I’ll continue to update you on any market moving earnings reports, so please stay tuned to this daily blog.