Alcoa misses estimates have analysts got Q1 wrong?

Posted on 12 April 2011 with 1 comment from readers

Alcoa the aluminum giant is also a bellwether stock as the first to report in the earnings season. Its results published after the bell yesterday missed analysts estimates. In past quarters they have always been ahead, leading the bull charge.

So what has changed in Q1? Alcoa blamed adverse currency movements, particularly the Australian dollar.

Black swans

But Q1 this year has seen a whole flock of black swans. The two biggest: the Japanese earthquake and Chernobyl level nuclear incident; and unrest, revolution and civil war in the Middle East and North Africa.

These are geopolitical events with wide ranging implications. Higher oil prices, up 25 per cent in Q1, is one immediate impact. Then there is the disruption to demand from Japan and global supply chains.

Consider your average multinational in Jebel Ali Free Zone in Dubai. At the start of the year it budgeted for regional sales. And how much are they now unexpectedly down due to regional disruptions, that might last all year?

In the US it was the Marriott hotel group that first sounded the alarm about a more disappointing quarter than expected. Global CEO Ed Fuller is in Dubai next week to unveil the world’s tallest hotel to the press but his biggest story of the year is likely already out.

For stock markets that have enjoyed a two-year rally this may finally be the end of the road. The money printing for QE2 is also coming to an end in June and without this dip-feed the rally is going to fizzle in any case.

Agora Financial’s Chris Mayer has recently warned on ‘Peak Profits’ with margin growth clearly unsustainable (click here). If the outlook for profits growth is just not as good as expected then stocks are over-priced.

Mr Market

Indeed, with a price-to-earnings ratio of 24 on the S&P Mr Market is already pushing towards the limits. Stocks in a bear market usually go below six as Dubai Financial Market did earlier this year.

The DFM showed signs of life yesterday with volumes up to 202,000 shares, still half of boom time trading. The exchange announced technical changes that will help meet criteria for inclusion in the main MSCI emerging markets index, a move that would require some fund managers to buy DFM stocks.

However, if global stock markets now take a tumble on disappointing Q1 profits then the falling tide will take all boats lower.