Alcoa's drop after earnings tells you what this market is worried about

04/13/2011 6:58 pm EST


Jim Jubak

Founder and Editor,

If Alcoa (AA) beat Wall Street earnings estimates by a penny for the first quarter when it reported after the market close on April 11, why did the stock fall 6.4% on April 12?

Because below the headline numbers, the company played into some math that has the stock market worried.

Let’s get rid of those headline numbers first. Alcoa’s penny a share earnings beat was a result of a lower than projected tax rate at Alcoa (27.3% versus the projected 30%). For the quarter revenue came in at $5.96 billion versus the Wall Street projection of $6.07 billion. That was a 22% increase from the first quarter of 2010.

And now let’s move on to that worrying math.

Results would have been better, the company said, except for higher energy and raw-material costs. Alcoa said that it is seeing higher prices for caustic and for carbon products.

Not a big deal—except that the stock is trading at a 30 month high.

So if you’re an investor in Alcoa, you might well have done your math like this:

On the plus side the company said aluminum demand will grow by 12% in 2011. That’s slightly better than the 10% growth in 2010.

But a lot of idled capacity has the potential for a restart in 2011—and that includes restarts in China and at Alcoa. Those restarts could be enough to push the aluminum market into surplus even with that 12% growth in demand.

So investors really can’t know what aluminum prices will look like in the second half of 2011, but they can be pretty sure that costs will be higher.

If that’s your math and you’ve got a good profit in Alcoa, then you sell--penny surprise or sales miss not withstanding.

The problem for this stock market is that a lot of the companies set to report this quarter will present something like that math to investors.

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