This Company Is Still Better Than Its Industry

| About: Alcoa, Inc. (AA)

By Richard Saintvilus

I recently recommended buying aluminum giant Alcoa (NYSE:AA) ahead of the company's fiscal first-quarter earnings report. I felt the valuation was significantly below where the company deserved to be. As with other companies, the stock has been in quicksand of late due to slowness in business spending and weak aluminum prices.

While many investors saw the stock as "dead money," I saw tremendous value in the Dow component - this is even though several prominent analysts had lowered their 2013 earnings estimates. However, though, the optimism rested on the company's own confidence. Despite the poor industry, management never wavered and believed in its ability to execute. The numbers proved it.

Starting on the right foot

Although very little was expected in this quarter, Alcoa demonstrated that its long term fundamentals were intact - posting a strong jump in first-quarter net income. This is despite achieving lower sales. Management said the increase in earnings was due to the company's extensive cost management along with strong aerospace industry demand.

The aluminum giant earned net income of $149 million, or 13 cents per share - topping the year-ago quarter, during which the company posted earnings of $94 million, or 9 cents per share. Excluding one-time items and other charges, earnings arrived at 11 cents per share, topping Street estimates of 8 cents per share.

However, revenue was not as exciting - falling 3% year over year to $5.83 million and missing Street estimates of $5.86 billion. Lower aluminum prices and reduced production from Alcoa's European mills significantly impacted sales. As noted, that is not a surprise and the Street wasn't expecting much.

Growth opportunities ahead

Still, this has not stopped investors from demanding better performance. But Aluminum prices can't stay down forever. And I think patience is still the best play here. And I don't think Alcoa should be assessed solely on how it is performing today. The world is always going to need aluminum.

For that matter, management guided for 7% growth in demand and has cited areas such as China to account for 50% of that growth. It's also worth noting here that despite the fiscal struggles of Europe, management offered some encouraging words, suggesting that Europe was beginning to show improvement.

What's more the fact that companies such as Ford (NYSE:F) and Boeing (NYSE:BA) have become large consumers of aluminum in their vehicles and jets, demonstrates that Alcoa's future is brighter than it is today. Tony Morales, Alcoa's marketing director suggests that an "aluminum-intensive" narrow-body jet made of new alloys would be up to 10% lighter than a composite-intensive plane and would cost 30% less to build and repair.

For Boeing, the cost savings can be significant, which in-turn should help improve margins. And Boeing can certainly use better PR help this days considering the numerous groundings it's had to suffer with regards to safety.

But in the meantime, Alcoa's investors should not ignore an opportunity to buy at significantly discounted rates. Management is too good and aluminum will always be in demand. Plus, when you factor appliance makers such as General Electric (NYSE:GE) might also contribute to the demand for aluminum, it's hard to not appreciate the value that Alcoa still presents as a stock.

In the long term, Alcoa should do well. But aluminum prices, which are still below normal levels, have to pick up. The good news, though, these prices should help the company reach/beat expectations in the coming quarters, including management's own outlook. This should position the company with increased confidence when the industry fully recovers as experts projects.

Here's making sense

Alcoa's stock is worth slightly more than the tangible book value on its balance sheet. Yet that book value figure is quite understated. Equally important, Alcoa should remain free cash flow positive, even if the economy failed to improve. But all signed suggest that the economy is getting better, which support better operating structures for Alcoa.

Then again, if the economy doesn't improve as industry experts believe, this still helps Alcoa as it will impact higher-cost rivals. In other words, regardless of what turns the industry takes, it's hard to not like Alcoa's chances.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: SaintsSense is a team of financial writers. This article was written by Richard Saintvilus, founder of SaintsSense. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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