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  • AA EPS and revenue estimates have stabilized.
  • The shuttering of more smelting capacity is troubling.
  • Cash-flow has improved, Kleinfeld focusing on cost structure.

Alcoa's (NYSE:AA) stock has had a monster run since early October, 2013, rising from $7.82 on 10/3/13 to its current level of $12.80 on 4/2/14, or an increase of 64% excluding the dividend.

The reasons can vary for the major move:

1.) Commodities have rallied in 2014, after the various commodity asset classes were dead money for the last few years, as money has rotated into underperforming sectors;

2.) There has been a decided move from growth to value so far in 2014, as evidenced by the biotech's and other momentum stocks and sectors getting whacked. Alcoa - as a deep value stock - was trading at just 1.06(x) tangible book value as of the January '14 earnings report;

3.) There is an increasing use of aluminum in auto's and aerospace, but high profile headlines by Ford (NYSE:F) and General Motors (NYSE:GM) about using more aluminum in new trucks and auto' models, certainly didn't hurt;

4.) For stock specific reasons, the fact is Alcoa looked like it was bottoming on the charts. When the stock was trading at $7.80 last summer and fall of 2013, the stock was trading at a 20% discount to tangible-book-value of $10 per share as of 12/31/13;

5.) Finally Street analysts could be in the early stages of thinking that an improvement in AA's EPS is in the works;

Alcoa has been one of our major lemons off the March, 2009, low as the stock traded as high as $18 by early 2011, and then fall all the way back to the $7.63 low on July '13. We have written repeatedly about Alcoa for readers here, and back in July '13 here and then from January, '13 here.

One thing that caught our eye while preparing this report is that the forward EPS and revenue estimates for AA have been stabilizing, i.e. 2014, 2015 and 2016.

AA EPS - estimates and actual

eps growth - actual and est 3/31/1412/31/13
2016 - estimate 0%-30%-21%
2015 - estimate 62%76%35%30%8%9%1%
2014 estimate 12%3%30%73%66%39%51%
2013 - actual 10%10%10%57%158%168%
2012 - actual -58%-58%-58%-58%-67%-65%
2011 - actual 33%33%33%33%33%33%
2010 - actual 100%100%100%100%100%100%
2009 - actual -67%-67%-67%-67%-67%-67%
2008 - actual -104%-104%-104%-104%-104%-104%
2007 - actual
2006 - actual -100%-100%-100%-100%-100%-100%
2005 - actual 175%175%175%175%175%175%
2004 - actual -38%-38%-38%-38%-38%-38%
2003 - actual 44%44%44%44%44%44%
2002 - actual 69%69%69%69%69%69%
2001 - actual 45%45%45%45%45%45%
2000 - actual -92%-92%-92%-92%-92%-92%
1999 - actual 17%17%17%17%17%17%
F/C 2015 eps estimate $0.60$0.42$0.46
F/C 2015 eps estimate $0.60$0.60$0.58$0.74$0.84$0.94$1.02
F/C 2014 eps estimate $0.37$0.34$0.43$0.57$0.78$0.86$1.01
F/C 2013 eps - actual$0.33$0.33$0.33$0.33$0.33$0.33$0.33$0.47$0.62$0.67
q4 '13 eps - actual$0.04$0.04$0.04$0.04$0.04$0.06$0.08$0.12$0.16$0.17
q3 '13 eps - actual$0.11$0.11$0.11$0.11$0.11$0.11$0.06$0.13$0.16$0.16
q2 '13 eps - actual$0.07$0.07$0.07$0.07$0.07$0.07$0.07$0.11$0.17$0.16
q1 '13 eps - actual$0.11$0.11$0.11$0.11$0.11$0.11$0.11$0.11$0.11$0.13
F/C 2012 eps - actual$0.30$0.30$0.30$0.30$0.30$0.30$0.30$0.30$0.24$0.25
q4 '12 eps - actual$0.11$0.11$0.11$0.11$0.11$0.11$0.11$0.11$0.06$0.07
q3 '12 eps - actual$0.03$0.03$0.03$0.03$0.03$0.03$0.03$0.03$0.03$0.03
q2 '12 eps - actual$0.06$0.06$0.06$0.06$0.06$0.06$0.06$0.06$0.06$0.06
q1 '12 eps - actual$0.10$0.10$0.10$0.10$0.10$0.10$0.10$0.10$0.10$0.10

Source: Thomson Reuters Estimate Detail

If readers look at the top EPS estimates when q4 '13 was reported, the estimated EPS for 2014 three months ago was expecting 3% growth, but today the 2014 EPS estimate has been boosted to 12% growth.

It is VERY important that Alcoa's forward EPS estimates for 2014, 2015 and 2016 not see further downward revisions, particularly after the earnings call on Tuesday, April 8th, 2014.

Another area of improvement for AA that has been in evidence for some time is their free-cash-flow. The quality of AA's earnings have improved: one litmus test is to track 4-quarter trailing cash-flow dividend by 4-quarter trailing net income, which cash-flow now covers net income by 6(x). Free-cash-flow covers net income by 3(x).

Cash flow information3/31/201412/31/2013
Cash from operations $920$214$514($70)$936$261$539($236)$1,302
Cash from investing ($425)($438)($474)$47($128)($222)($1,098)$394$860
Cash from financing ($171)$53($276)($285)($673)($282)$546($350)($1,101)
Net change in cash $324($171)($236)($308)$135($243)($13)($192)$1,061
Cash from operations $920$214$514($70)$936$261$539($236)$1,302
Capital expenditures ($422)($250)($286)($235)($398)($302)($291)($270)($433)
Free- cash- flow $498($36)$228($305)$538($41)$248($506)$869
4q trailing CFO $1,578$1,594$1,641$1,666$1,500$1,866$1,928$2,193$2,193
4q trailing CFO yoy growth rate 5%-15%-15%-24%-32%-17%-17%21%-3%
4q trailing capex $1,193$1,169$1,221$1,226$1,261$1,296$1,372$1,353$1,287
y/y growth -5%-10%-11%-9%-2%6%30%35%27%
capex as % of revenues 5%5%5%5%5%5%6%5%5%
capex as % of Free-cash-flow 76%73%74%74%84%69%71%62%59%
4q trailing FCF $385$425$420$440$239$570$556$840$906
FCF as % of market cap 4%5%5%4%2%6%6%7%9%
4q trail CFO $1,578$1,594$1,641$1,666$1,500$1,866$1,928$2,193$2,193
4q trailing net income $238$440$415$595$540$264$293$609$882
6.63 3.623.952.802.787.076.583.602.49
4q trailing FCF $385$425$420$440$239$570$556$840$906
4q trailing net income $238$440$415$595$540$264$293$609$882
cash-flow cvg of net inc 1.620.971.010.740.442.161.901.381.03
FCF yield (% of revenues) 2%2%2%2%1%2%2%3%4%
FCF yield (% of mkt cap) 4%5%5%4%2%6%6%7%9%
quarterly dividend $33$33$33$33$33$33$33$33$33
quarterly share repo
quarterly capital returned
4q trailing dividend $132$132$132$132$132$132$132$132$132
4q trailing share repo
4q trailing capital allocated $132$132$132$132$132$132$132$132$132
capital retn'd as % of 4qtr FCF 34%31%31%30%55%23%24%16%15%

* Source: internal spreadsheet

Looking at the price of aluminum over a 1-year and 5-year time frame, the reader can quickly see how the commodity has been beat to snot, although the 6-month time frame for the aluminum price has started to improve.

Valuation: when looking at Alcoa's forward EPS and revenue estimates, the Wall Street consensus per Thomson Reuters is expecting an "average" of 25% EPS growth for '14 through '16, on 3% revenue growth.

At 7(x) cash-flow though, while the expected EPS growth might look aggressive, the reasonable price-to-cash-flow valuation of AA gives me some comfort.

Technically, when the stock traded above $10.90 area, it broke out of a 5 - 6 year trade below the key 200-week moving average.

(click to enlarge)

The monthly chart looks even better (not shown) with AA under heavy accumulation.

The $11 area should be very good and solid support on any pullback.

Our internal intrinsic value estimate on AA is $17.50 per share, which is pretty close to the January, 2011, high for the stock around $18, while Morningstar assigns an intrinsic value to AA of $14 per share. Since our earnings-based intrinsic value model tends to be more volatile in terms of its intrinsic value estimates, If I took a 9-quarter average of all of AA's intrinsic value estimates arrived at internally, we get $14.65 per share.

The point is, after AA's monster 64% run in the last two quarters, the stock could be closer to full value.

However when AA reports next Tuesday, April 8th, after the closing bell (Street consensus is expecting $0.05 per share on $5.59 billion in revenues for another y/y decline of 55% in EPS and 5% in revenues.

Here is what we will be listening to on the call:

1.) Aluminum demand for 2014, still expected in the 7% range globally;

2.) Any improvement out of Europe in terms of demand or any other geography for that matter;

3.) It is a given that downstream demand is strong, given auto's and aerospace, but new data points will help;

4.) Any expectation for aluminum price improvement since demand seems to be strong and supply is tightening;

After the call, we absolutely want to see AA's revenue and EPS estimates remain stable or (better yet) be revised higher.

The fundamentals must improve to support the impressive technical move in the stock the last 6 months.

We have a 3% position in the stock, and may wind up trimming a little prior to next week's call, but we plan on maintaining the bulk of our AA position for clients into and beyond the earnings release and conference call.

Thanks for reading.

Disclosure: I am long AA, F. 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.

Source: Alcoa Earnings Preview: Technical Breakout - Can Fundamentals Follow?

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