7 Winners of a Pollyanna Earnings Season

04/17/2012 10:15 am EST




Well, first-quarter earnings season is upon us, and the bellwethers that have reported so far are looking for a pretty bright 2012...so here are a few beneficiaries, writes Chad Fraser of Investing Daily.

Earnings season got off to a strong start last Tuesday, when Alcoa (AA) reported profits that were far ahead of analysts’ expectations.

Here’s how the numbers looked: In the first quarter of 2011, the world’s third-biggest aluminum maker earned $94 million, or 9 cents a share. (Excluding special items, Alcoa earned 10 cents a share, or $105 million.)

The latest earnings were down sharply from $308 million, or 27 cents a share, a year earlier, but they still handily beat the loss of 3 cents a share that analysts were forecasting. The unexpected profit comes after Alcoa. reported a loss of $191 million, or 18 cents a share, in the fourth quarter of 2011.

Revenue edged up to $6 billion. That also beat the Street’s expectation of $5.77 billion. The company saw strong year-over-year revenue increases across many of its end markets, including commercial transportation (up 32%), aerospace (up 15%), and automotive (up 7%). These gains offset lower revenue from industrial products (down 14%) and building and construction (down 5%).

Alcoa stood by its projection of a 7% increase in global aluminum demand this year. Even so, it continues to close high-cost smelting operations under a restructuring plan that will trim its overall refining capacity by 12%, or 390,000 metric tons.

“Lead-Off Hitter Putting One Over the Fence”
The stock shot up 6.2% on the news, closing at $9.90. Due to the company’s long-held position as a bellwether for the economy as a whole, it pulled the rest of the market up with it.

That brought a collective sigh of relief from the Street, especially in light of the market’s recent losing streak and tepid expectations for the coming earnings season.

In “Alcoa’s Profit Keeps It in the Lineup,” MarketWatch.com writer Jim Jelter chose a sports analogy to sum up investors’ reactions: “It’s like watching your team’s lead-off hitter put one over the fence. There are still nine innings to go, but the game sure is off to a surprisingly good start.”

Most analysts see the company’s gains continuing, but despite all the optimism, a note of caution still hung in the air.

In a research note issued yesterday morning, Jefferies & Company called Alcoa’s earnings decline disappointing, but: "That said, the stock does appear to have found a floor near $10. And as the US recovery continues to gather momentum, we believe Alcoa shares can trade modestly higher this year. But we are unlikely to raise our $12 target until Alcoa’s free cash flow meaningfully improves. We don’t expect that until 2013.”

The brokerage placed a Buy rating and a $12 price target on Alcoa Inc. shares.

“Pulling a Fast One” on the Market
Zacks.com also liked what it saw. In “Alcoa Beats, Outlook Bright,” it zeroed in on the company’s cost cuts, which are helping it offset rising raw-materials prices:

“Alcoa is divesting underperforming assets through its restructuring program. The company is making efforts to reduce costs of its upstream business and to achieve record profits in its midstream and downstream businesses.”

Meanwhile, at TheStreet.com, Deborah Borchardt accused Alcoa of “pulling a fast one” on the market in light of the company’s earlier hints that its results would be disappointing. “Isn’t it great,” she said, “how you can lower expectations, then turn them around and beat them, and the market cheers about this excellent performance?”

Alcoa Isn’t the Only Way to Profit
Despite yesterday’s jump, Alcoa has struggled along with the entire US economy in the wake of the recession, dropping 44% in the past year. And it continues to face challenges, including low aluminum prices and ongoing weakness in Europe.

Another way to profit from rising aluminum demand is to do as Stephanie Link of TheStreet.com suggests, and buy shares of companies in Alcoa’s strongest end markets, such as commercial transportation (trucks), aerospace, and automotive.

Link likes truck equipment makers Eaton (ETN) and Cummins (CMI), but you could also look at carmakers such as Ford (F) and Honda (HMC), and aerospace firms like Boeing (BA).

Another possibility? Canada’s Bombardier (Toronto: BBD.B), which makes commercial and business jets. It’s also one of the world’s leading manufacturers of railway cars and recreational vehicles, such as personal watercraft and ATVs.

How do you think the rest of this year will play out? And what do you make of the fact that Alcoa says demand is increasing but they're shuttering plants and laying off workers? Are they talking a different game than they're playing? Shoud we expect a tougher 2012 that we're being promised?

Read more from Investing Daily here...

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