Alcoa greatly exceeded analyst estimates, with EPS of 18 cents, which was 50% higher than analysts’ expectations. Wells Fargo’s Q2 results matched analyst EPS estimates of $1.01.
The traditional start to earnings season occurred this week, as Alcoa Inc. (AA.N) announced its results on Tuesday. Although Alcoa’s earnings report is generally considered the beginning of earnings season, there are actually a significant number of companies that report before Alcoa, comprising an earnings “preseason.” History shows that earnings preseason results frequently give clues as to the direction of the earnings season as a whole. When preseason companies beat their estimates more than normal, the companies reporting throughout the entire earnings season tend to beat estimates more than normal as well, and vice versa. This pattern has held 68% of the time since 2001.
This quarter, 64% of the companies reporting before Alcoa exceeded their consensus EPS estimates, a slightly higher percentage than the 63% long-term beat rate for earnings seasons as a whole. This doesn’t offer a strong signal either way; however, it could be interpreted to mean that the earnings beat rate may be fairly typical. Another factor that suggests this may be the case is the muted downward revisions since the beginning of the second quarter. Typically, the earnings growth estimate for the S&P 500 falls by 4 percentage points between the beginning and end of the calendar quarter. Second-quarter earnings growth projections only fell 2.2 percentage points during the quarter. This is a bullish signal because it suggests that analysts are less conservative than usual, although it could limit earnings upside if the smaller level of revisions results in a similarly smaller earnings surprise factor.
Exhibit 1. S&P 500: Percent of Companies Beating Analyst Estimates – Preseason vs. Full Earnings Season
Source: I/B/E/S data
Alcoa Inc. (AA.N) smashed analyst estimates with EPS of 18 cents. Alcoa’s earnings surprise was 50% higher than the 12-cents-per-share profit that analysts were expecting. The company benefited from tightening alumina supply throughout the industry as described by CFO William Oplinger during the earnings call. He explained, “The 2014 alumina surplus tightened since the first quarter by roughly 1.4 million metric tons, driven by two factors. First, Indian production is not coming online as quickly as we expected. And secondly, China imports are increasing. The change in the aluminum projection is driven by a lower surplus in China, reflecting curtailments that have been executed. In the rest of the world, most of the curtailments announced during the first half have been executed.”
Although it was after the preseason, Wells Fargo & Co. (WFC) reported its second-quarter results last week, matching its $1.01 analyst EPS estimate, which was 3.1% higher than the $0.98 the company earned in the second quarter last year. With a large presence in the mortgage business, Wells Fargo’s outlook on the U.S. housing market is informative. During the earnings call, John Shrewsberry, CFO, stated the company’s expectation of a continued housing market rebound, and discussed the changing contribution of mortgages due to higher interest rates. He said, “Mortgage fees, while up from first quarter, were down $1.1 billion from a year ago due to lower refinancing volume. Excluding mortgage fees, fee income was up 9% from a year ago, reflecting broad-based growth in retail brokerage, deposit service charges, card fees, commercial real estate brokerage commissions, trust and investment management, merchant processing, and market-sensitive revenue.”
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