2 Stocks To Buy Now Ahead Of Earnings

| About: Alcoa, Inc. (AA)

By Richard Saintvilus

With the second quarter's earnings upon us, investors should be looking for opportunities missed in the first quarter. While there were several stocks that outperformed their peers by a significant margin, there were also those that underperformed. Now it's time to press the reset button. As such here are two stocks that deserve some attention ahead of earnings.

Buy Alcoa (NYSE:AA) - Price Target $12

Aluminum giant Alcoa didn't have a great 2012. Investors realized that regardless of how exceptional its management team might have been, they were not magicians. The company was not immune to depressing macro challenges. However, management has been making all of the right moves. And if fourth quarter earnings were any indication, investors should feel excited that the worst is over.

The company posted an 8% decline in revenue due to soft production and shipment levels, especially on a sequential basis. Still, revenue was enough to beat analysts' estimates. This is despite prolonged weakness in aluminum prices.

The company showed strong improvement in profitability as gross margin advanced by almost four points, while operating income jumped 200%, which was helped by the sales of the Tapoco Hydroelectric Project facility, which generated a gain of $161 million after taxes. Plus it was also encouraging that the company's various business segments continued to improve.

For instance, even though alumina was down roughly two-thirds, it still arrived much better than expected. Management was also able to reverse losses from the company's main metal business. What's more, midstream and downstream operations posted record results. And management expects this performance to continue. In that regard, Klaus Kleinfeld, Alcoa's CEO said:

Alcoa hit record profitability in our mid and downstream businesses, and continued to drive efficiency in our upstream businesses in the fourth quarter, all while cutting debt and maintaining our cash position. We overcame volatile metal prices and global economic instability to deliver on our targets for the fourth year in a row. We enter 2013 in a strong position to maximize profitable growth.

In terms of outlook, management guided for a 7% increase in aluminum demand for 2013. This is 1% higher than all of 2012. Plus, the company was extremely bullish on China and suggested that 50% of its growth will come from that region, which makes the state of the Chinese economy very important to Alcoa.

In other words, placing a bet on Alcoa here will require patience. But if the company's recent performance serves as indication, investors will be rewarded for their time. The Street is expecting earnings-per-share to arrive flat at 10 cents. Meanwhile, revenue is expected to decline slightly to $5.9 billion, down from $6 billion last year.

While these are not robust figures, the Street understands the industry challenges that have impacted the company. In that regard, the stock remains undervalued by at least 40%. $12 to $15 per share seems the more reasonable target based on the aggregate effect of ongoing improvement. This also assumes an 8 times forward multiple on 2013 EBITDA, which is .5 lower than the company's historical average.

Buy Adtran (NASDAQ:ADTN) - Price Target $22

After a tough carrier spending environment in 2012, during which Adtran lost 34% of its value, it was hard to pinpoint where the company was heading next. As with Alcoa, there were signs that the worst was over. While it's not a glowing endorsement, Adtran has the management in place to execute a turnaround.

However, I also like Adtran for other reasons. For instance, when Oracle (NYSE:ORCL) picked-off Acme Packet (APKT), I started canvassing the sector to figure out who was next. These dominoes tend to drop pretty quickly. And considering Acme Packet's tough time - posting soft revenue due to the heavy reliant on carrier spending - Adtran was as good of an acquisition candidate as any, given its better relative performance.

For instance, although Adtran's fourth-quarter results weren't great, they were in-line with expectations. Revenue dropped 20% year over year and 13.7% sequentially. As has been the case with larger players like Cisco (NASDAQ:CSCO), Adtran's enterprise hardware was heavily impacted, down 6% year over year. But the company was able to offset the weakness with growth from dealer channels. And I think this area will be key to Adtran's future.

Likewise, the company is making strides with value added resale channels, which increased 12%, helped by growing demand of the Bluesocket wireless LAN product. Adtran continues to be underestimated for its technology. While this company is not flashy and rarely generates headlines, it does not mean Adtran lacks in innovation or demand.

Surprisingly, though, amid tough fiscal concerns overseas, Adtran posted 9% growth in international revenues with Broadband surging up 100% year over year. If Adtran can get more aggressive in its strategic focus, I think this company can impress a name like Cisco enough to consider an acquisition. I think Adtran has some attractive assets that would appeal to Cisco - the Bluesocket wireless LAN product being one example.

Plus, Cisco can't ignore the 100% year-over-year growth in broadband access business. In the meantime, it's interesting that Adtran is beginning to attract analysts' attention. Stephens recently issued a downgrade citing valuation, yet maintains a price target of $25, which is almost 37% higher than Adtran's closing price of $18.55 on Friday. This sums up the finicky nature of this sector. But with shares at such a low level Cisco should begin to pay more attention. So should investors.

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, one of our tech analysts. 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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