As Alcoa Inc (AA) Reports Q1 Results, Here Are 2 Earnings Season Themes To Watch

UPDATE 4:30 p.m. EDT

Shares of Alcoa Inc. (NYSE:AA), the world's third-largest producer of aluminum, dropped more than 3 percent in extended-hours trading Wednesday to $13.23 after the company's quarterly revenue and forecast for global aluminum demand this year fell short of Wall Street estimates.

Alcoa reported first-quarter net income of $195 million, or 14 cents per share, as revenue rose 7 percent to $5.8 billion, compared with a net loss of $178 million, or a loss of 16 cents per share, on sales of $5.45 billion a year ago. Wall Street had expected Alcoa to report first-quarter revenue of $5.94 billion, according to analysts polled by Thomson Reuters. The company said its 7 percent revenue growth from a year earlier was driven by strong automotive and aerospace volume.

Alcoa upwardly revised its final 2014 global aluminum demand growth from 7 percent to 9 percent. However, the company forecast demand for global aluminum will rise 6.5 percent in 2015, lower than a previous projection for a 7 percent gain.

UPDATE 3:07 p.m. EDT

Alcoa Inc. (NYSE:AA) will kick off first-quarter earnings season after the closing bell Wednesday, in what's expected to be a tepid reporting period. S&P 500 profits are expected to decline 1.5 percent from a year ago, their worst showing since 2009, according to research firm Estimize.

First-quarter earnings will set the tone for 2015's next few quarters, as analysts have significantly lowered their expectations, driven by two primary factors: low energy prices and the continued strength of the U.S. dollar.

Declining Oil Prices Will Continue To Hit Energy Sector

Last year, Alcoa reported its strongest full-year results since 2008, boosted by increased sales of aluminum supplies to carmakers and aerospace companies. However, the company’s outlook for a 7 percent increase in aluminum demand could be at risk in the midst of economic weakness in China, the world’s largest consumer of aluminum.

The precipitous drop in oil prices also has weighed on commodity prices, including aluminum. “We are expecting that mining and energy stocks are going to have a difficult quarter,” said Mike Baele, managing director at U.S. Bank Wealth Management in Portland, Oregon. “The key is going to be what companies say about the future.”

Alcoa is expected to report first-quarter net income of $291.41 million, or earnings per share of 25 cents, on revenue of $5.94 billion, according to analysts polled by Thomson Reuters. That compares with a net loss of $178 million, or a loss of 16 cents per share, on sales of $5.45 billion a year ago.

Firms linked to the oil industry are expected to continue suffering from the more than 50 percent drop in crude prices since mid-2014. Profits declined nearly 20 percent in the energy sector in the fourth quarter, and earnings growth in the sector is expected to be down 59 percent in the first quarter, according to research firm Estimize.

Currency Issues Remain for U.S. Multinationals in Q1

A stronger U.S. dollar isn't exactly good news for American corporate bottom lines. Another major theme this earnings season will be the strengthening dollar's effect on the revenue and profits of U.S. multinationals. The robust dollar is a huge drag on growth for the benchmark S&P 500 because the index’s companies derive more than 40 percent their revenue overseas.

Many U.S. multinationals warned of currency effects during the October-December quarter, including Google Inc., the Coca-Cola Co. and Ralph Lauren Corp. As the U.S. economy steadily improves, the value of the dollar continues to advance against major currencies. The greenback has gained around 15 percent against major world currencies in the past six months, and more than 22 percent in the last year.

A prolonged period of dollar strengthening hurts U.S. multinational corporations when they convert foreign revenue to dollars, thereby slowing earnings growth. Some companies will feel the pain more than others. Almost 83 percent of Intel Corp. sales, for instance, come from overseas, while Qualcomm Inc.’s international sales account for 97 percent of its annual revenue.

Most analysts have never seen this kind of oil market coupled with the challenges of such a strong dollar, says Brad McMillan, chief investment officer at Commonwealth Financial Network. “Historically, you’ve seen earnings headwinds from a lack of domestic demand, but this is not the case,” said McMillan.