As the Dow Breaks Records, This Top Stock Misses Earnings

Wall Street is certainly getting into the earnings season spirit… The Dow soared more than 300 points yesterday afternoon, rising above 26,000 for the second time in a week. So far in 2018, the Dow and S&P 500 have tacked on about 5% gains. But that’s not helping everybody yet. In today’s blog we’ll take a look at what went wrong when one top stock kicked off earnings season in earnest yesterday afternoon.

The reality is that the broader indices have been climbing nearly straight up since the tax reform bill was signed into law ahead of the Christmas holiday. With the corporate tax rate falling from 35% to 21%, investors and analysts alike are betting that earnings can only go up for many U.S. companies. And they’re not wrong!

However, as we’ve discussed before, we won’t see these tax savings boost earnings until the first-quarter earnings announcement season in April and May. And that was obvious after the closing bell yesterday when Alcoa Corporation (AA) reported fourth quarter earnings.

Shares of aluminum producer Alcoa slipped more than 4% after the company’s results missed the consensus estimate. The company reported a net loss of $196 million, or a loss of $1.06 per share, on $3.17 billion in sales. Adjusted earnings per share were $1.04. Analysts were expecting adjusted earnings of $1.22 per share on $3.29 billion in sales, so Alcoa posted a 14.8% earnings miss and a 3.7% sales miss.

While it’s disappointing that Alcoa missed fourth-quarter sales and earnings estimates, here’s what we need to remember: Alcoa’s revenues increased 24.8% year-over-year and earnings per share surged a remarkable 642.9% year-over-year. Alcoa’s earnings were impacted by short-term operational challenges and energy market factors, namely the drought in Brazil which impacted Alcoa’s bauxite business. But, consider this: For full-year 2018, Alcoa reported net income of $217 million, or $1.16 per share. Revenue came in at $11.64 billion.

Looking toward to full-year 2018, the company is targeting to have $1 billion in cash on hand, and to return 50% of their excess cash to shareholders. They’re also looking for adjusted EBITDA between $2.6 billion and $2.8 billion, and expect to ship between 13.8 mmt (millimetres) and 14.0 mmt of alumina, up from 13.7 mmt shipped in 2017.

Overall, the fourth quarter was still a solid one for Alcoa, and the upcoming quarters appear strong as well. For the first quarter of 2017, analysts are currently expecting Alcoa to produce sales between $2.81 billion and $3.33 billion, representing 6% to 26% annual sales growth. Adjusted earnings per share are forecast to increase 47.6% year-over-year to $0.93. What’s even better is that analysts have not lowered their guidance on Alcoa. Plus, the company expects global demand for aluminum, their primary product, to increase from 4.25% in 2017 to 5.25% in 2018.

Until tomorrow,

Louis Navellier

Louis Navellier

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