Alcoa, Novellus and Infosys: Preparing for Another Round of Earnings

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 |  Includes: AA, INFY, NVLS-OLD, QQQ
by: Stock Traders Daily

Monday will mark the unofficial start of second quarter earnings season when aluminum producer Alcoa (NYSE:AA) kicks things off. For many in the investment community, the return of corporate earnings will be a welcomed change from the past couple of months. Without much in the way of company news or events, the focus of the broader markets has centered on the bevy of macroeconomic concerns from around the globe. Namely, the media has centered its attention on the fiscal disasters of Greece and Portugal – and most recently, the very poor employment report in the U.S.

With those headlines now mostly in the rearview mirror for now, the question turns to whether this earnings season will be the catalyst that ignites another bull market run, just as we have seen over the past several quarters. While companies are still poised to benefit from ultra-low borrowing costs and streamlined workforces, there is some concern this time around that rising commodity prices may cut into profit margins, and that a slowing global economy may hinder forward guidance. Many pundits have recently predicted that the second half of the year will be a strong one, so it will be interesting to see if corporate America agrees.

Supply/Demand Environment Favorable for AA

After the market closes on July 11, Alcoa will release its second quarter results with the Street expecting it to report EPS of $0.35 on revenue of $6.33 billion. On a year-over-year basis, this would equate to strong profit growth of 169% and sales growth of 22%. The company is poised to benefit from a couple of key tailwinds in the aluminum market. For instance, as with many other commodities, supply of aluminum has been rather constrained, and demand could pick up in the auto sector in particular as Japan continues its recovery efforts from the tsunami. In terms of total global aluminum demand, AA reaffirmed last quarter that it expects 12% growth this year.

However, working against the company would be higher energy and material costs, as well as a continued weak dollar. Overall, though, sentiment is mostly positive for AA heading into its quarterly numbers, and the stock has rallied some 10% over the past two weeks, breaking out of its near-term downtrend. The stock does have resistance overhead that traders need to be aware of. Therefore, we urge our readers to first review our trading report on AA to learn about its key trading levels before entering a position.

Guidance Key for Novellus

With Novellus Systems (NASDAQ:NVLS-OLD) reaffirming and narrowing its second quarter EPS guidance on June 1, much of the mystery has been taken out of its quarterly results. Specifically, for those who may have missed it, the company guided for EPS of $0.70-$0.80 versus its prior expectation of $0.65-$0.80, with revenue of $330-$372 million compared to the $352.29 million Street consensus.

The company, which develops equipment used in semiconductor manufacturing, has seen its shares lag the broader markets over the past few months, down roughly 8% compared to a 2% gain for the PowerShares QQQ ETF (NASDAQ:QQQ). One of the issues dogging NVLS is that it has suffered from a couple of material order push-outs from key customers, Taiwan Semi and Samsung. At this point, what investors want to know is, were these order push-outs only a short term, one-time issue, or is there a deeper problem developing? From a broader perspective, the company should be in good position to capitalize on expected healthy capex spending from large semiconductor producers. The stock, meanwhile, is trading near a key resistance level around $37. An upbeat outlook should help it take out that level. To learn more about NVLS’ technical levels of interest, read the trading report.

Infosys Looking for a Rebound

India-based IT consulting service company Infosys Technologies (NYSE:INFY) is looking to reverse its slide which has been precipitated by disappointing first quarter results back on April 15. After an amazing run in 2009 and 2010, in which its stock rocketed higher by about 200%, INFY has fallen on tougher times in 2011. The primary issue facing the company and stock of late is that its margins have slipped, which has resulted in weaker-than-expected earnings guidance from the company. Additionally, following its prolonged extension higher, the stock became quite rich. In fact, it still trades with an elevated trailing P/E of ~25x and P/S of 6.3x.

The good news is, the stock has been charging higher heading into its report, illustrating confidence that the company will issue solid results on July 12 before the market opens. Still, for INFY to break its year-to-date downtrend, the stock will need to move into the low-$70s, and there is resistance prior to reaching that level. Please check out our trading report on INFY.

Control risk with our trading reports from this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.