Should IBM Replace Alcoa as Earnings Season Indicator?

The first-quarter earnings season is unofficially here. Late Monday, aluminum giant Alcoa (NYSE:AA) announced its financial results for the first three months of the year. The results were mixed, but the economic bellwether should not be given too much consideration. In fact, another major company has a better correlation with the direction of stocks.

Net income rose to $149 million (13 cents per share), compared to $94 million (9 cents per share) a year earlier. Excluding special items, Alcoa earned 11 cents per share. Revenue for the first quarter dropped 3 percent to $5.83 billion from the same period last year. It was a beat on the bottom line, but a miss on the top. Analysts were expecting adjusted earnings of 8 cents per share on revenue of $5.88 billion.

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“This was a strong quarter led by record profitability in our downstream business, improved results in our midstream business, and remarkable upstream performance in the face of weak metal prices,” said Klaus Kleinfeld, Alcoa CEO, in a press release. “Our mid and downstream businesses now account for 72 percent of our total after-tax operating income while our upstream business continues to move down the cost curve. We achieved these results by focusing on the things we can control and by pressing Alcoa’s innovation edge, scale, and strength in end markets.”

Alcoa is not very useful for an early read on earnings season…

While the results were decent and Alcoa even reaffirmed its projection of 7 percent global aluminum demand growth this year, the company is not exactly a leading indicator for the S&P 500 (NYSEARCA:SPY).

Since 2009, Alcoa has reported earnings above the mean EPS estimate 9 times out of 16 quarters. In those nine quarters, 73.6 percent of companies in the S&P 500 also reported earnings above EPS estimates on average, according to FactSet. However, in the 7 times that Alcoa came in below the mean EPS estimate, 72.6 percent of companies in the S&P 500 still beat EPS estimates on average. The slight difference shows that Alcoa has “little predictive value in determining the earnings performance of the remaining companies in the index.”

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Investors set on betting the earnings season on one single stock, may want to pay closer attention to International Business Machines (NYSE:IBM). Bespoke Investment Group looked at every stock in the S&P 500 and how they correlated with earnings season. The computer giant had the highest correlation. When IBM beats earnings estimates, the S&P 500 trades higher 80 percent of the time over the next five weeks. However, when IBM misses estimates the S&P 500 trades lower 75 percent of the time, serving as a much better indicator than Alcoa.

On Friday, the earnings attention will shift towards the banking sector, as JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) both report before the opening bell. Shares of Alcoa finished unchanged on Tuesday.

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