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Alcoa (NYSE:AA) reported q4 13 earnings a week ago and the stock fell 5% last Friday January 10th, as EPS missed and the Global Rolled Products took a hefty charge.

Although I've been long Alcoa for far too long, and don't want to be perceived as an apologist for the stock, the fact is AA's results offered longs some signs of hope for the next year or two.

1.) Cash-flow continues to improve, if only because a higher discount rate reduced the pension obligation by $500 ml in 2013. AA's cash-flow coverage of net income, which we view as a quality measure for the stock continues to improve.

Currently AA is trading at 7(X) cash-flow and 28 free-cash-flow;

2.) For the first time in over 2 years, AA's 2015 EPS estimate rose sequentially: last quarter the 2015 EPS estimate after the release of the October earnings was 0.58 per share. Following the Jan '14 release, the '15 estimate rose to $0.60 per share. Doesn't sound like much but that is the first change in trend in years, not to be ignored;

3.) q4 '13 spot premia improved in the 4th quarter which indicates improved demand for the metal, i.e. better demand for spot delivery. That is also something that hasn't been seen in 2 - 3 years;

Klaus Kleinfeld maintained or targeted global aluminum demand at 7% in 2014, in line with 2013, but there is some growing evidence that demand is improving and supply is tightening.

Technically, AA needs to trade with volume above the $11.05 - $11.10 area, which is the 200-week moving average. If the stock can punch through here with any robust volume, I do think that the next stop will be the early 2011 high near $18 per share.

Here is AA's cash-flow and free-cash-flow coverage of net income, something we use to evaluate quality of earnings:

AA's cash-flow and free-cash coverage of net income
TTM CFOTTM net inccvg TTM FCFTTM net inccvg
12/13$1.6$2386.63 $385$2381.62
9/13$1.6$4403.62 $425$4400.97
6/13$1.6$4153.95 $420$4151.01
3/13$1.66$5952.8 $440$5950.74
12/12$1.5$5402.8 $239$5400.44
9/12$1.9$2647.07 $570$2642.16
6/12$1.9$2936.60 $556$2931.90
3/12$2.2$6093.60 $840$6091.38
12/11$2.2$8822.49 $906$8821.03
9/11$2.3$1.171.92 $1.035$1.170.88
6/11$2.3$1.071.19 $1.27$1.071.19
3/11$1.8 bl$822 ml2.21 $820$8221.0

On a cash-flow per share basis, AA is trading at 7, and as the above table details cash-flow easily covers net income and even free-cash-flow covers net income over some periods.

Supply / demand and pricing could be on the verge of changing the for the aluminum producer.

Source: Alcoa Earnings Redux: Not As Bad As You Might Think