Alcoa Kicks Off Earnings Season, Stocks Look for Direction

By Frank Yu
Frank Yu
Frank Yu
July 10, 2011 Updated: July 10, 2011

NEWS ANALYSIS

VOLATILE TRADING: A floor trader looks on at the New York Stock Exchange before the closing bell on July 8, after the U.S. Labor Department announced a dismal June jobs report. (Mario Tama/Getty Images)
VOLATILE TRADING: A floor trader looks on at the New York Stock Exchange before the closing bell on July 8, after the U.S. Labor Department announced a dismal June jobs report. (Mario Tama/Getty Images)
NEW YORK—The U.S. stock market has been on a roller coaster ride over the last month, but as the second-quarter earnings season gets under way, investors will look for major industries’ bellwethers for clues on the U.S. economic recovery.

Aluminum producer Alcoa Inc. unofficially kicks off corporate earnings season on Monday, after market close. Alcoa will be the first of several important earnings reports next week. Internet giant Google Inc., as well as JPMorgan Chase & Co. and Citigroup Inc., two of the nation’s biggest banks, will also report this week.

Analysts expect the Pittsburg-based Alcoa to do well, as the company is an indicator of economic activity as aluminum is a key raw material for many industrial companies. The price of aluminum has also risen over the past year, which would benefit Alcoa.

Alcoa’s shares have been boosted by high material prices, as well as its recent $1 billion multiyear contract with commercial airplane producer Airbus, which was signed at the recent Paris Air Show. The agreement will provide Airbus with a new type of aluminum-lithium alloy that Alcoa has developed, which is lighter than traditional aluminum.

JPMorgan Chase & Co., the nation’s second-biggest bank by assets, will report on Thursday. The Jamie Dimon-led New York-based bank is expected to post revenues similar to the same quarter last year, but with slightly better credit write-offs.

Citigroup follows on Friday, and the bank is expected to post flat results, although its international operations should provide a boost. As commercial and residential real estate markets remain as weak as ever, lenders will continue to see high loan reserve costs.

As with prior quarters, energy firms are expected to continue to post strong earnings, as gasoline prices were high during the second quarter. Crude oil prices averaged around $95 per barrel, which is $20 per barrel higher than the same period last year.

In addition, investors will look to companies to give a clearer picture of their rest-of-the-year forecast, including which direction they believe the economy may go. Hewlett-Packard Co. is the last of the Dow Jones components to report earnings, on Aug. 18.

Google in Spotlight

TOUGH CALL: A trader makes a phone call on the floor of the New York Stock Exchange last Thursday. Investors will be looking at the second quarter earnings season, which begins this week, for guidance on the economic recovery. (Mario Tama/Getty Images)
TOUGH CALL: A trader makes a phone call on the floor of the New York Stock Exchange last Thursday. Investors will be looking at the second quarter earnings season, which begins this week, for guidance on the economic recovery. (Mario Tama/Getty Images)
Google is expected to post earnings of $6.78 per share, the company advised, a 19 percent increase from last year. Shares of Google fell 3 percent last Friday after Morgan Stanley downgraded its stock. The company switched reins earlier this year, with co-founder Larry Page taking the helm as chief executive, and former CEO Eric Schmidt moving to the role of executive chairman of the Mountain View, Calif-based firm.

Google missed its earnings expectation last quarter, mainly due to a big hike in R&D expenses after Larry Page took the role of CEO. Page had increased hiring and spending to jump start the company’s research, attempting to revive its innovative past.

Later on, we learned that the company was focused on social media and social networking, which culminated in its launch of Google+ to battle popular networking platform Facebook Inc.

A project that had been underway for several months, led by Vic Gundotra, Google+ is currently in test mode, will eventually make its way into almost every Google offering.

Exports and Currency

The U.S. Department of Commerce is expected to release May U.S. trade figures, which will give an update on the nation’s trade deficit.

In April, the U.S. trade deficit unexpectedly came down, to the lowest levels this year, as exports soared.

Generally, as the dollar has weakened considerably over the past few months, the currency will give U.S. exporters a boost as goods would appear less expensive for consumers in other nations.

In fact, the weaker currency is expected to give some corporations, which generate a majority of their sales outside of the United States a lift in their earnings. For example, chipmaker Intel Corp. generates an overwhelming percentage of its revenues—up to 85 percent—outside of the United States, giving it an edgy when it converts sales back to its domestic currency.

Overall, economists and analysts polled by Thomson Reuters expect industrial firms to report 15 percent higher earnings than the same quarter in 2010, and with the consumer discretionary and technology industries up 10 percent and 12 percent, respectively.

 

Frank Yu