The Earnings Shell Game

I've been putting bits and pieces of passing news in my rather short term memory bank, but the trend is something that my long term memory bank remembers pretty well.

So AA is kicking off earnings season, but how many of us remember what has happened running up to earnings season?

Remember the song, "What have you done for me lately"? Earnings are about expectations, the entire market is about expectations or you might call it sentiment. So is a beat really a beat when the bar is lowered significantly enough for a step to look like a high hurdle?

As of last Friday, 130 of the 500 S&P companies pre-announced among a back drop of analysts lowering expectations. Of the 130 S&P companies, 99 of them, almost 20% of the S&P came out with negative pre-announcements, only 30 were positive.

Thompson-Reuters did some simple math and added some historical perspective. The ratio of negative to positive pre-announcements is 3.3 (99 divided by 30) thus far. As for the historical perspective, 3.3 is the largest Negative/Positive ratio since Q4 of 2008 during the midst of the recession.

The thing is, many unsophisticated investors are headline scanners only, they see a beat and they buy, but did they remember the lowering of guidance several weeks earlier?

It should be an interesting earnings season as Wall Street plays the shell game.

Since AA is in the commodity space, lets look at the trend there.

It's not looking good for the 4th quarter, especially on a year over year basis, but can they spin this in to something positive?

As for AA, they should have reported by now, let's see what they came out with....

A fourth Quarter loss of $193 million. Last year AA's Q4 was $258 million in profits, that's a turnaround y.o.y of $451 million!

Revenue however was up this quarter 6% to $5.99 billion vs a year ago at $5.65 billion. That's 6% and below the double digit returns the S&P s normally expected to produce.

Consensus was for a loss of $.02 a share on revenue of $5.72 billion, they came in at a loss of $.03 per share (missed there) but beat on revenue at $5.99 billion and what everyone wants to hear at least until it's lowered several weeks before the next report, they expect a rise in demand of 7%.

The shell game part is kind of neat..

AA on a operational basis, meaning no accounting gimmicks, lost $.18 a share and that on higher revenue! That's called a margin squeeze, but to make sure no one other then a PhD in Wall Street accounting can really figure out what to make of this report, Alcoa added $232 million in restructuring charges and extra costs for this quarter alone. Hmmm.

Based on Cap-Ex, Alcoa spent cash this quarter, maybe I'll take back the part about a margin squeeze, it's a bit worse then that when they're burning through cash to keep the smelters running.

One curious bit caught my attention, they are forecasting 7% demand growth and a GLOBAL aluminum supply deficit in 2012.

Kleinfeld the chairman/CEO said, “For 2012, we expect global aluminum demand to grow 7 percent and are forecasting a global deficit in primary aluminum supply.”


The 7% demand is above AA's 6.5% demand that is needed to justify AA's forecast of a doubling of global demand between 2010-2020. Sounds pretty good then right?


I wonder why AA announced yesterday that they'll be shutting down smelters?


Here are some more being shut down.


AA is pretty much flat in after hours, which may explian why I couldn't find any real earnings edge in 3C before the close.