Aluminum producer Alcoa Inc. (NYSE:AA) kicked off earnings season Monday, reporting the company’s strongest full-year results since 2008, sending shares up more than 1 percent to $16.39 in after-hours trading. Alcoa’s results were boosted by increased sales of aluminum supplies to carmakers and aerospace companies.
Not all companies this earnings season will be as lucky. Cheap global oil prices and a strong U.S. dollar are beginning to affect corporate earnings. Expert forecasts paint two very different portraits for earnings season. Tumbling crude oil prices will rout energy companies and dropping gasoline prices help consumer discretionary companies.
Overall fourth-quarter earnings are forecast to grow by 4 percent compared with a year earlier, according to analysts polled by Thomson Reuters. Profit growth is expected to continue coming in strong for S&P 500 companies, currently estimated at 8.8 percent, down slightly from 11.7 percent the previous quarter. However, revenues, which seemingly had been improving over the last two quarters, are expected to drop down into the low single digits with growth anticipated at 1.9 percent.
Declining Oil Prices Will Hit Energy Sector
Firms linked to the oil industry are expected to suffer from the more than 50 percent drop in crude prices since mid-2014. The energy sector is the biggest and only laggard this quarter, according to Estimize. As global crude oil prices have dropped more than 40 percent since June, oil, gas and consumable fuels companies are expected to take the biggest hit during the fourth quarter. The energy sector includes Schlumberger Limited, the world's largest oilfield services company, and Halliburton Company, the world’s second largest oilfield services provider. Profits and revenues from the energy sector are estimated to be down 16.6 percent and 12.7 percent, respectively.
Consumer Discretionary Companies Will Benefit Most From Falling Gas Prices
There are sectors that will benefit from declining oil prices, including consumer discretionary companies, or corporations that sell nonessential goods and services, such as Amazon.com Inc., McDonald's Corp. and Home Depot Inc. In the midst of the holiday shopping season, U.S. consumer sentiment hit an almost eight-year high in December, boosted by declining gasoline prices and more favorable labor market conditions. The average cost of gasoline in the U.S. has fallen to $2.12 per gallon, down $1.20 from a year ago, according to Gasbuddy.com.
“It’s no surprise consumer discretionary will be one of the big winners as well, with an improving economy, jobs numbers, and lower gas prices all leading to a rise in consumer confidence,” Estimize Research said in a note to investors Sunday.
The overall consumer discretionary sector is expected to see profit growth 10.3 percent in the fourth quarter and only 4 percent on the top-line, according to Estimize. Earnings winners include internet retailers expected to increase 15 percent, followed by leisure companies, up 16.5 percent, and automobiles up 17.9 percent.
Other sectors poised to benefit from lower oil prices also include industrials, such as airline companies and shipping corporations, like FedEx Corporation and United Parcel Service, Inc. The industrials sector is forecast to post bottom-line growth of 10.2 percent with revenues of 2.5 percent. Airlines and air freight and logistics lead the pack with profits expected to grow 28.5 percent and 27.5 percent, respectively.
“Logistics companies, such as FedEx and UPS, admittedly have reaped the rewards of lower fuel costs, while airlines, which typically pass fuel surcharge savings onto customers have instead increased flight fares and padded the bottom-line,” Estimize said.
Stronger U.S. Dollar Could Create Headwinds for U.S. Multinationals
As the global economy remains mixed, due to economic uncertainty in Europe and China, the U.S. dollar has continued to strengthen against currencies in less stable economies, such as the euro and Japanese yen. A prolonged period of dollar strengthening would hurt U.S. multinational corporations once they convert foreign revenue to dollars. That will slow earnings growth. Nearly 83 percent of Intel Corporation's sales, for instance, come from overseas while Qualcomm Inc.'s overseas sales account for 97 percent of its annual revenue.
During the third quarter many companies factored the impact of a stronger dollar into fourth quarter and full year guidance. McDonald’s expects a negative impact of 5 cents to 6 cents for the fourth quarter, and 9 cents to 10 cents for the full year. Meanwhile, Johnson & Johnson said low currency exchange rates would lead to a sales growth rate decline of 1.5 percent.
Last quarter Coca-Cola, General Electric, and Johnson and Johnson named Europe as the weakest of all of their operations.
“While China will likely be a topic amongst this quarter’s releases, the region is less likely to have as negative an impact despite continual softening seen there,” Estimize said. While China’s economy is slowing, corporate profits have not seen any great impact yet as a result. Companies such as tech giant Apple Inc., Alcoa and Nike Inc. mentioned China as a bright spot in third quarter earnings, while McDonald’s, Yum! Brands noted a downtick.
“As we enter 2015, we suggest that investors focus on US stocks with high domestic sales, firms with high cash returns to shareholders via buybacks and dividends, and shares with low turnover,” Goldman Sachs Global Investment Research said in a research note to clients.
For its part, Alcoa saw a jump in quarterly and annual profits during its “transformation” year in 2014, as higher sales in Alcoa’s “value-add businesses”--such as its downstream growth markets, metal prices and energy sales--drove sales.
Last year was a pivotal one for Alcoa after the former Dow Jones Industrial Average component of 54 years was replaced by athletic-gear maker Nike Inc. in September 2013.
Alcoa, the world's third-largest producer of aluminum, reported fiscal fourth quarter net income of $159 million, or 11 cents per share, on revenue of $6.4 billion, compared with a profit of $40 million, or earning per shares loss of $2.19, on revenue of $5.59 billion a year ago.
Wall Street had expected the company to post net income of $341 million, or earnings per share of 24 cents, on sales of $6.032 billion, according to analysts polled by Thomson Reuters.
Shares rallied in extended-hours trading after the company posted adjusted earnings per share of 33 cents, topping analysts’ expectations of 27 cents a share.
“Our strong fourth quarter capped a pivotal year as we significantly accelerated Alcoa’s transformation. In 2014 we delivered Alcoa’s strongest operating results since 2008. We enter 2015 on solid footing, poised to continue transforming and growing,” Klaus Kleinfeld, Alcoa chairman and chief executive officer, said in the report.
For the full year, Alcoa posted net income of $268 million, or 21 cents per share, on revenue of $23.9 billion, compared with a net loss of $2.3 billion, or $2.14 per share, on sales of $23.03 billion in 2013.