Alcoa and Yum! earnings to reflect China's economic collapse: Estimize

Earnings season kicks off this week in its usual fashion with aluminum giant, Alcoa (AA) reporting results on Thursday.

There are 5 S&P 500 companies out this week including Pepsico (PEP), Constellation Brands (STZ), Monsanto (MON) and Yum! Brands (YUM). Arguably, Alcoa and Yum! Brands will be the two that are most impacted by the economic collapse in China during the quarter.

YUM! Brands reports results after Tuesday’s closing bell, and contributors on Estimize are expecting higher results than Wall Street. The Estimize EPS consensus currently stands at $1.10 vs. the Street’s $1.08. Revenues are also slightly higher at $3.75B on Estimize as compared to Wall Street’s prediction of $3.71B.

Yum continues to see fallout from food quality concerns in China that were uncovered in February. Business in China makes up about half of it’s sales and has been performing poorly since it was revealed earlier in the year that a main supplier re-labeled meat that was passed its expiration date. Last quarter, same store sales in China fell 10% as a result. Despite that, CEO Greg Creed said the company is still on track to open at least 700 new restaurants in China by the end of the year. The company has also reiterated that FY 2015 EPS growth will come in at least 10%.

On the bright side, Yum’s domestic business has been doing well thanks in part to strength in its breakfast category. Fast food breakfast has become big business here in the U.S. and Yum subsidiary, Taco Bell has evolved into one of the biggest players, continually adding new items to their menu. However, unlike competitor McDonald’s (MCD) which offers all day breakfast, Taco Bell only offers the menu from 5am - 11am. Due to success with it's breakfast offering, YUM is adding Taco Bell restaurants at a fast clip.

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As mentioned, Alcoa will unofficially kick off the season on Thursday. Estimize is looking for EPS of $0.18 vs. $0.16 from Wall Street, implying a year-over-year (YoY) decline of 72%. Revenues are expected to hit $5.79B as compared to the Street’s $5.70B, also a YoY decline of 7%.

Year-to-date aluminum prices are down 14% due to waning demand. One negative for Alcoa has been the collapse of China’s economy. While China is the largest exporter of aluminum and competes against Alcoa’s business, a drop in demand for many products that are created using Alcoa’s alumina is impacting demand for the base metal. For example, the company is expecting a 4 - 6% decline in the heavy duty truck and trailer market in 2015 due to weakness in China, worse than prior guidance of negative 2 - 4%.

The aerospace and automotive segments are expected to offset some of this weakness however, anticipated to grow 8 - 9% and 2 - 4%, respectively. However, last quarter the company cut EPS estimates by $0.09 and reduced full year 2015 and 2016 projections by approximately 20%. The stock has followed suit, falling 40% YTD.