Earnings Silly Season, Alcoa Edition

by CC July 11, 2011 6:05 pm • Commentary

Alcoa met or just missed its earnings per share estimate of 32 cents depending on who you ask. Consensus estimates were about 32 or 33 cents a share. More importantly, this is a bigger miss of consensus estimates of even a few weeks ago:

The company had beaten estimates for four quarters running. CNBC just said something about how every time Alcoa had beaten estimates in the prior 7 quarters, the S&P had gained about 2.5% in the following 30 days. No word on what happens when they don’t beat expectations but rather meet them instead.

And of course, as is typical in the kabuki theater of earnings season, Alcoa has “met” lowered earnings expectations. According to FactSet, the mean forecast for Alcoa’s quarter was 36 cents as recently as May 31. On June 30, or less than two weeks ago, that forecast was 35 cents.

And, you know, this is just a technicality, I suppose, but FactSet still has the consensus forecast at 33 cents, not 32. Update: I’ve also seen a consensus out there of 34 cents. Update 2: That 34 cent estimate was an earlier FactSet consensus pulled from MarketWatch.

Suffice to say Alcoa matched the lowest set of estimates available. How bullish is that?

This is something to watch for because it has become quite common for companies to get analysts to lower their estimates going into earnings, only to beat or meet the new revised lower estimates. Alcoa couldn’t even pull that off. By way of Barry Ritholtz:

Albert Edwards is the uber-Bear who sits on the Global Strategy Team at Société Générale. Edwards notes:  “It’s that surreal time of the quarter, just ahead of the reporting season, when US companies cajole compliant analysts into reducing their profit forecasts so that on the day the company can record a positive earnings surprise.”

Here’s Edwards:

“Yet, as the cycle once again starts to slow and with sky-high margins, this time around the downgrades may be for real.

My Quant colleague Andrew Lapthorne has long railed against the nonsense that masquerades as the US reporting season. Companies place so much store on beating analysts’ estimates that they play this ridiculous game of guiding down analysts numbers in the weeks or even days ahead of the announcement, only to beat depressed forecasts by a penny on the day. The angle in the press and in analysts’ reports is then that this constitutes ‘good news’ despite, more often than not the outturn undershooting the market estimates of only a few weeks previous. Nuts!

But ultimately you can’t fool all of the people all of the time and the market eventually punishes these earnings manipulators. Indeed Andrew a while back put together a trading strategy shorting those companies who beat estimates on the day but not from a month earlier (see Earnings manipulation – why Investors should avoid the MUC (Manipulated Underperforms Conservative).

All these shenanigans make any assessment of what is actually going on with the profit cycle on an underlying basis extremely difficult, especially during the reporting season. One has to stand slightly aside from the seasonal white noise.