Alcoa opened the third-quarter earnings season with a downer. More critical economic bellwethers will deliver results in the days ahead.
Alcoa was the first company in the Dow Jones industrial average to report results for the third quarter. The news wasn't good for the aluminum maker's stockholders, but one downer certainly doesn't speak for the rest of the stock market.
As disappointing quarters go, Alcoa's doesn't sound all that awful. Its revenue for the quarter that ended September 30 met Wall Street's expectations, but Alcoa's net income of 61 cents a share missed analysts' average profit estimate by 14 cents a share, enough to unleash a moderate selloff in Alcoa shares. On October 11, the day when it released earnings, Alcoa (symbol AA) lost $1.44, or 5%, to close at $26.85.
Alcoa observed that aluminum is still in high demand, with the exception of reduced orders from U.S. automobile makers. It called the quarter the "third best in company history," although earnings declined from this year's second quarter, mainly because of lower aluminum prices. Most analysts followed up by slightly trimming 2007 profit predictions.
By and large, Wall Street still recommends Alcoa for the longer term, presumably meaning to late 2007 and beyond. Alcoa is spending heavily on new mines and smelters, both in America and overseas, so it's anticipating a continuation of strong global growth. Some 40% of Alcoa's revenues are recorded outside the U.S. The biggest threat to its prosperity would be a worldwide recession, a remote prospect to be sure.
In sum, the consensus is that the third quarter at Alcoa was a temporary, company-and-industry-specific setback rather than a broad economic indicator that would dash spreading optimism about stocks.
Still, there are days when bad news from a single important company can trigger a sharp decline in the market indexes. Happily, Alcoa's fall didn't have coattails. The Dow sank 50 points, or about 0.3%, at the opening on October 11, with the drop attributed to the Alcoa shortfall. But the average recovered all that by lunchtime before dropping a bit later because of some Federal Reserve comments. (As one of the Dow's lower-priced issues, Alcoa has less influence on the price-weighted industrial average than most of its fellow components.)
In the next few days, more critical economic bellwethers among Dow companies will be delivering third-quarter earnings reports. These include Citigroup, General Electric, IBM, Intel, Johnson Johnson, and J.P. Morgan Chase. If several of these big guys come up short or temper decent-sounding results with cautious statements about the rest of the year or 2007, then you'll have reason for concern. But this looks like a case of a strong team that gets upset in its first game of the season. There's no reason why the stock market cannot look past Alcoa and prevail in the months ahead.