View quarterly earnings in the context of consensus estimate trends.

On July 8th Alcoa (AA) kicked off the second quarter, 2013 earnings season.  Headline ‘adjusted earnings’ were $0.07 vs. analyst estimates of $0.06.  The financial media proclaimed the results a ‘beat’ and the initial reaction pushed Alcoa shares higher in after-hours trading.  Before acting on an earnings ‘beat’ or ‘miss’, it is critically important to frame your analysis in terms of the trend in analyst earnings estimates.

The attached graph, courtesy of Zero Hedge, shows that through the first half of 2013, equity analysts have cut their Q213 EPS Adjusted Estimate for Alcoa from $0.17 to a low of $0.06.  So is a penny ‘beat’ at $0.07 really all that?  No it isn’t.  Just two weeks ago the estimate was $0.08 which would have made today’s $0.07 release a ‘miss’.  The Q213 estimate in January, 2011 was $0.68 and in June, 2012 it had been lowered to $0.29.  The intermediate and long term earnings trend is decidedly lower.  AA shares have fallen from over $17 in January, 2011 to under $8 today.  Not good.

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2013/07/20130708_AAEPS.jpg

Further making a mockery of the earnings release is the market’s emphasis on the ‘adjusted’ earnings of $0.07.  GAAP results including restructuring charges were a loss of $0.11 per share.  To make matters worse, year over year comparisons of key metrics are negative:

  • Revenue of $5.849 billion, down 1.9% Y/Y
  • CapEx $286 million, down 1.7% Y/Y
  • Free Cash Flow $228 million, down 7.3% Y/Y

I’d personally prefer a stock which ‘missed’ analyst earnings expectations by a few cents but where the earnings trend is positive and rising.  If investors sell off those shares on a ‘miss’, perhaps against overly optimistic projections, I would view any sell-off in those shares as a buying opportunity.

If you find these equity insights beneficial and would like assistance with your accounting and investment activities, please contact me, Christine Meder at Christine Meder’s Accounting Advisory Services.  My email is mederchristine1526@gmail.com and you can tweet me at @christinemeder1.  I’m offering a free 30 minute consultation during the month of July.  #unrbrand

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About Christine Meder
Leveraging my insights and professional experience of 25 years in the accounting profession, I and my firm Christine Meder's Accounting Advisory Services provide our high net worth clients expert advice on their business activities and investments. In addition to performing traditional accounting functions in a confidential manner, I pride myself in giving clients a competitive edge whether it be in running their businesses or managing their investment portfolio. My studies leading up to completion of the EMBA program at the University of Nevada, Reno this August provide me with latest skills and techniques utilized across a broad spectrum of business functions. This breadth of education is complemented with experience as an accountant in the construction, mining, real estate and technology fields during my career. If you are looking for a trusted adviser or consultant in addition to someone you can rely on to properly keep your books, please contact me.

3 Responses to View quarterly earnings in the context of consensus estimate trends.

  1. Pingback: How Institutional Investors Would React to Weak Earnings Results This Quarter | Market Curator

    • I like your blog and thanks for your comment. As earnings reports roll out for the Q213 reporting period I agree that many firms who are reporting less than stellar results are talking up the back half of 2013 to make their numbers and encouraging their investors to hold out for a rosy 2014. More kicking of the can down the road. That said; equities are trading in their own world and are fully detached from fundamentals and the investors who fails to acknowledge that are at risk of leaving rising equity markets based on weakening economic reports and tepid corporate results.

  2. Pingback: Yum! Brands, Inc. – Another earnings beat? Not so tasty. | Christine Meder's Accounting Advisory Blog

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