Wall Street isn't feeling good about Alcoa's prospects, apparently. Shares are down more than 4% ahead of the earnings call. Aluminum prices have been pounded lately; China's economic issues have a lot to do with that. So at this point, investors are fleeing the prospects of a bearish earnings report.
- Nearest Resistance: $12.50
- Nearest Support: N/A
- Catalyst: Pre-earnings selling
Technically speaking, the fleeing should have been done back at the end of May, when Alcoa violated key support at $12.75. At this point, shares are in free-fall mode. While better-than-expected numbers could help reverse course in Alcoa this week, that's more of a lottery ticket than a high-probability trade.
TheStreet Ratings team rates Alcoa as a hold with a ratings score of C+. TheStreet Ratings team has this to say about its recommendation:
"We rate Alcoa (AA) a hols. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth and compelling growth in net income. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, generally higher debt management risk and poor profit margins."
Highlights from the analysis by TheStreet Ratings team include:
- The revenue growth came in higher than the industry average of 17.4%. Since the same quarter one year prior, revenues slightly increased by 6.7%. Growth in the company's revenue appears to have helped boost the earnings per share.
- ALCOA INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year,Alcoa turned its bottom line around by earning $0.19 versus -$2.15 in the prior year. This year, the market expects an improvement in earnings ($0.92 versus $0.19).
- The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Metals & Mining industry and the overall market on the basis of return on equity, Alcoa has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.
- AA's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 25.21%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
- Alcoa's debt-to-equity ratio of 0.76 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Despite the fact that AA's debt-to-equity ratio is mixed in its results, the company's quick ratio of 0.67 is low and demonstrates weak liquidity.
You can view the full analysis from the report here: AA Ratings Report
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.