Reframing Reality

At what point do investors do some homework and get a little perspective on reality?  Let's carefully examine the Alcoa earnings numbers and reframe them with a perspective in line with the truth.

Alcoa announced last night that third quarter earnings ending September 2009 was $0.04 per share on sales of $4,615,000,000.  Alone that means nothing.  The market measures progress or regression.  I have been in this business over 22 years and the only fair way to measure earnings is on a year over year comparison.  This relieves seasonal adjustments.  For example; retailers do better in the fourth quarter with increased holiday sales versus the summer quarter when shoppers are at the beach.  All industries are compared in the year over year fashion.

Looking at Alcoa's earnings from the quarter ended September 2008, they earned $0.37 on sales of $6,970,000,000.  So upon closer examination their sales were down 34% and their earnings were down 89% year over year.  That is the actual and only framing that should be made here.  Are things improving?  I would say with earnings down 89% - that doesn't look so good.

However, the market wants you to focus on how Alcoa did versus analyst expectations - which I will refer to as the market cheerleaders.  Now the cheerleaders were a gloomy lot who thought earnings would come in for Alcoa as a loss of $0.09 per share this quarter and when the group of cheerleaders were found to have been wrong - Alcoa and the market soared this morning on the news!

Let's be clear here, these market analysts were the same folks who last year said that there was no way anyone could have predicted the downturn for corporate America's earnings in the second half of 2008.  They were completely wrong to the high side last fall as the market plunged.  Now we are expected to accept their word as gospel as they are, for two quarters in a row, underestimating earnings to the downside.  Instead of rallying the markets on an 89% earnings miss by Alcoa, why don't we demand better analysts - or ignore them altogether?

Many will say we need to know the perception of earnings, so we can gauge the current price in relation to the difference of publicized earnings and the companies perceived value prior to the earnings announcement.  So let's check how Alcoa has done from the lows of this year.  On March 6, 2008 Alcoa stock traded at $4.97.  I assume the analysts then felt that the largest aluminum manufacturer in the world, a multibillion dollar company, was going out of business.  Since then to yesterday, the day before their earnings were announced, the stock skyrocketed 186% to $14.20 as we realized Alcoa had some business value. 

The stock currently trades on an infinite Price Earnings ratio, because on a trailing twelve month basis as they have negative earnings.  Behind the numbers, much of the improvement in their earnings came from cost-cutting. The company said there are signs that aluminum demand will get stronger in China, but cautioned that demand in the rest of the world is likely to remain sluggish.  According to Briefing.com's earnings calendar, of the 19 companies that have reported earnings results this week, only four have reported year-over-year revenue growth. 

We all want to see the economy and the markets improve and get back to normal.  With the stock market as a whole already bid up 57% from the lows and companies like Alcoa bid up triple that, at what point in time do we demand real growth of earnings versus better than cheerleaders expectations.  No offense to the current or former cheerleaders of America, but you didn't want to copy off their papers to get through school.  When you realize who pays these analysts, you will realize that they may have a bias involved in trying to make the comparisons easy, so we follow along and drink the Kool - Aide that earnings are getting better.  In my book earnings down 89% year over year are not better, but actually worse, and should be a call to caution instead of the rallying cry I hear from major media today.  Just a thought to help you look at earnings, as more releases come.

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