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 its announcement sets the tone for earnings season.
Unfortunately, the aluminum producer completely whiffed it with third-quarter results. While earnings rose 48% compared with last year, sales slumped 6.5%. Alcoa also managed to miss both sales and earnings estimates. Its earnings per share of $0.32 missed the $0.34 consensus estimate by 5.9%. Alcoa’s Q3 sales of $5.21 billion missed the $5.33 billion consensus estimate by 2.3%.
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. And, because there is an inverse relationship between commodities and the dollar, this has hurt Alcoa’s aluminum sales. To add insult to injury, aluminum prices have been falling of late.
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 triple-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 five of eight fundamental metrics: Sales Growth (F), Operating Margin Growth (F), Earnings Growth (F), Cash Flow (D) and Return on Equity (D). The stock receives a C 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, I’d probably 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 2.1% earnings decline and 2.6% sales growth for the third quarter. That would mark the sixth straight quarter of earnings declines, but the first quarter of positive sales since Q4 2014.
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 fall. 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.