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The third-quarter earnings season will begin in a few weeks. Alcoa is usually one of the first, is not the first Dow component to report. As such, it becomes the "New Hampshire Primary" of earnings season. And like the Granite State, Alcoa is not a very good representation of the entire market.

In July, Alcoa reported strong earnings and that was a positive—and accurate—indicator for the rest of the earnings season. Also, Alcoa’s seconcd-quarter earnings report came at a very good time, one day after the terrorist attack in London. The market clearly wanted to see some good news.

But I remember being struck by Morgan Stanley’s comments. The firm was nearly alone in being unimpressed with Alcoa’s earnings, and it reiterated it “equal-weighting” rating. Now it seems they were on to something. Today, Alcoa cut its profit outlook for the third quarter.

Alcoa said it expects earnings from continuing operations to be between 27 cents and 31 cents a share for the third quarter, well below the current Thomson First Call average estimate of 43 cents a share. A year earlier, the company earned 34 cents a share from continuing operations.

Aluminum prices have rebounded 10% on the London Metal Exchange during the third quarter to about $1,858 a metric ton of aluminum, up from less than $1,700 a ton in early July. However, Lloyd O’Carroll, chief economist and metals analyst at BB&T Capital Markets in Richmond, Va., says part of the problem for Alcoa is the lag between when contracts were signed in the second quarter—when aluminum prices were lower—and when the sales were finalized in the third period.

Indeed, the company said that while aluminum prices have strengthened recently, those improvements won't fully be felt until the fourth quarter.

The company said demand was weaker in Europe and also in the North American automotive market, which has seen auto production slow in recent months amid higher gas prices. Alcoa also said that its results could be affected by the recent hurricanes. The company has temporarily closed its alumina refinery in Point Comfort, Texas, as well as its anode plant in Lake Charles, La. “You would think one of them would get hit,” Mr. O'Carroll said. “They are at risk. How much damage and how big a deal this is, it’s too early to know.”

That’s a pretty hefty cut in earnings. Again, I wouldn’t say that Alcoa is a good indicator for the rest of the economy, but it does tell me that there are some soft spots out there.

Posted by edelfenbein at September 23, 2005 11:27 AM