It’s obviously still very early, but earnings season has not gotten off to a good start. Aluminum giant Alcoa kicked off the fourth quarter reporting period on Monday after the market close and got it off on the wrong foot. Revenues were up together with higher metals prices, but profits failed to meet expectations. The Street had expected a profit of six cents per share, but Alcoa earned just one cent per share, excluding one-time charges, thanks to higher energy costs that cut into margins. Including the charges, Alcoa lost twenty-seven cents per share. Alcoa shares dropped sharply on the news, but we’re more concerned for what the report will mean for other companies.
As we noted on Monday, energy costs have climbed rapidly and have put our long-term key in the negative-to-neutral range, and edging closer to a sell signal. Copper and other major materials are well off their lows too, and as we’ve written extensively rising energy and commodity costs act as a brake on any economy, let alone one that just may be starting to recover. We will be watching earnings reports to see how companies are coping with these rising input costs while at the same time battling a tough consumer environment and struggling to grow their topline sales numbers.
Most companies have a favorable comparison period as the fourth quarter of 2008 marked the height of the financial crisis – with credit markets seizing in the aftermath of the Lehman Brothers collapse, and consumers tightening their pocketbooks. In earnings reports throughout the recession and specifically over the last year, we’ve seen companies resort to inventory reductions and cost cutting measures to protect profits, but there is only so much you can cut. As we start receiving firms’ fourth quarter report cards, we’ll see if/how they were able to grow their sales and profits during the period, which in turn, will give us a better idea of where the economic recovery lies.
While our companies’ earnings reports will begin in earnest next week (with some exceptions, like Intel’s report after the close tomorrow), we got a sneak peak at portfolio member Chevron’s (CVX) report on Monday. The integrated oil giant, which is expected to release its full production and profit report on January 29th, said that the recently completed fourth quarter’s earnings will be down from the third quarter. Demand for processed crude like gasoline and diesel was down while crude prices rose, contributing to significantly weaker refining margins and crimping earnings. At the same time, it appears the second-largest U.S. energy producer pumped significantly more oil than during the same period last year as new wells came into production. The company averaged output of 2.77 million barrels in October and November, an almost 10 percent increase. Even with the earnings warning, we continue to recommend Chevron as a conservative play in the energy patch. The company boasts one of the strongest production growth profiles among the major integrated producers while also offering investors a dividend yield of 3.4 percent.
