Wednesday, July 8, 2009

Alcoa's Loss Inexplicably Satisfies the Market

Alcoa, after losing 59 cents/share in Q1, "swung"(why is this term used so often) to a Q2 loss of either 47 cents or 26 cents/share, depending upon what one chooses to include in a calculation of loss. We would also note that the flurry of articles published post-announcement tended to preface the losing results with the term "only"; as if to give consolation to the fact that the Company failed to fulfill it's only purpose for existence: turning a profit. The company's revenue was only up 2.3% from the first quarter, indicating that the earnings "improvement" was simply a result of cost-cutting. Alcoa's President/CEO Klaus Kleinfeld had the following to say:
"Our cash generation initiatives, productivity improvements, and portfolio changes are working"

Translation: we cut costs through firings and reductions to employee's hours. As evidenced by the included chart, Selling, General and Administrative expense has been reduced substantially over the previous 5 quarters. However, because the media tends to fixate on Positive second derivative movements, we'd like to point out that Alcoa's cost cutting has declined in it's acceleration; setting the stage for flat earnings in the quarters ahead. Of course, if you are bullish on automotive sales and new housing construction - two industries upon which Alcoa relies heavily - then further cost-cutting should not be an issue for you. We are not bullish on these two areas of economic activity however, and contend that Alcoa's cost cuts will have to increase on an accelerating basis in order to continue to report Street-Acceptable earnings "growth". We would also propose that this dynamic can be applied to the majority of the corporations that comprise the S&P 500 index. Needless to say, while cost cuts may bode well for the bottom line, they do not stimulate the economy.
*no position in AA

Sphere: Related Content

No comments:

Post a Comment