Will Alcoa Pass Critical Earnings Test Tuesday?

Apr. 7.14 | About: Alcoa, Inc. (AA)

Alcoa Inc. (NYSE:AA) is set to report FQ1 2014 earnings after the market closes Tuesday, April 8th. Alcoa is the world's third largest producer of aluminum. The aluminum company's revenue has steadily been declining over the past two years. Alcoa stock hit a low in July reaching prices of $7.63. Since the summer bottom shares have rebounded and climbed 63% to $12.47. Beating analyst estimates has been a positive catalyst for Alcoa stock while the company is going through a period of sales contraction. Last quarter Alcoa managed to report to better than expected revenue but missed EPS forecasts by a few pennies. Although shares have rallied over the past 3 quarters, Wall Street still expects year over year EPS and revenue to fall by 54% (6c per share) and 4.5% respectively. Here's what investors are expecting from Alcoa. Click to enlarge

The information below is derived from data submitted to the Estimize.com platform by a set of Buy Side and Independent analyst contributors.Click to enlarge

(Click Here to see Estimates and Interactive Features for Alcoa)

The current Wall Street consensus expectation is for Alcoa to report 5c EPS and $5.573B revenue, while the current Estimize.com consensus from 21 Buy Side and Independent contributing analysts is 6c EPS and $5.641B in revenue. This quarter the buy-side as represented by the Estimize.com community is expecting Alcoa to beat the Wall Street consensus on EPS and revenue.

Over the previous 6 quarters the consensus from Estimize.com has been more accurate than Wall Street in forecasting Alcoa's EPS and revenue 3 and 4 times respectively. By tapping into a wider range of contributors including hedge-fund analysts, asset managers, independent research shops, students, and non professional investors Estimize has created a data set that is more accurate than Wall Street up to 69.5% of the time, but more importantly it does a better job of representing the market's actual expectations. It has been confirmed by Deutsche Bank Quant. Research and an independent academic study from Rice University that stock prices tend to react with a more strongly associated degree to the expectation benchmark from Estimize than from the Wall Street consensus.

The magnitude of the difference between the Wall Street and Estimize consensus numbers often identifies opportunities to take advantage of expectations that may not have been priced into the market. In this case we are seeing a moderate difference between the two groups' expectations.Click to enlarge

The distribution of estimates published by analysts on the Estimize.com platform range from 3c to 11c EPS and from $5.500B to $5.740B in revenues. This quarter we're seeing an average distribution of estimates on Alcoa.

The size of the distribution of estimates relative to previous quarters often signals whether or not the market is confident that it has priced in the expected earnings already. A wider distribution of estimates signaling less agreement in the market, which could mean greater volatility post earnings. Click to enlarge

Over the past 4 months the Wall Street EPS consensus started and ended the period at 5c, while the Estimize consensus fell from 7c to 6c. Meanwhile the Wall Street revenue declined from $5.790B to $5.573B before the report, while the Estimize forecast also pushed lower from $5.694B to $5.641B. Timeliness is correlated with accuracy and downward analyst revisions at the end of the quarter are often a bearish indicator. Click to enlarge

The analyst with the highest estimate confidence rating this quarter is princebhojwani, who projects 3c EPS and $5.500B in revenue. princebhojwani is ranked 44th overall among over 4,000 contributing analysts. Over the past 2 years princebhojwani, has been more accurate than Wall Street in forecasting EPS and revenue 58% and 50% of the time respectively throughout 170 estimates. Estimate confidence ratings are calculated through algorithms developed by deep quantitative research which looks at correlations between analyst track records and tendencies as they relate to future accuracy. In this case, princebhojwani is making a bearish call expecting Alcoa to miss the Estimize community's expectations on both the top and bottom line.

Although Alcoa has never truly recovered from its 2008 highs in the $40 range, the aluminum producers have made great progress in the past 9 months. Tuesday's earnings report represents an important hurdle for Alcoa to pass to keep share price growth on track. Sales and earnings are both expected to fall compared to last year, however, this quarter contributing analysts on the Estimize.com platform expect Alcoa to beat the Street's expectations on both EPS and revenue.

Disclosure: None