Market's Missed Reaction To Alcoa's Earnings Beat Provides Buying Opportunity

| About: Alcoa, Inc. (AA)
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Alcoa (NYSE:AA) unofficially kicked off earnings season today when presenting its third quarter earnings report. Alcoa has seen its shares drop 9% in the last 52 weeks. Today's earnings report sent shares up marginally to $9.19 in the after hours market, despite beating analysts' targets on earnings per share and revenue.

For the third quarter, Alcoa reported a loss of $143 million, or $0.13 per share. This includes a $175 million environmental lawsuit payout. Excluding one time items, Alcoa would have earned $32 million, good for $0.03 in earnings per share. Analysts on Yahoo Finance were calling for $0.00 in earnings per share, after the company posted $0.15 in last year's third quarter. Revenue for the third quarter was $5.8 billion, a decrease of 9% from the prior year. Analysts were expecting $5.54 billion in revenue, after the company reported revenue of $6.42 in the third quarter of 2011. Revenue was lower due to a 5% decline in the realized price of aluminum.

Alcoa lowered its 2012 global aluminum demand estimates to six percent. The company had previously set this mark at 7%, but now sees weakened Chinese demand hitting the second half of the year. Despite these revisions, global aluminum demand is still on track to hit long term targets. In 2010, Alcoa predicted global aluminum demand to increase at a compound annual growth rate of 6.5% to double by 2020. In 2010, aluminum demand was up 13%, before falling to 10% in 2011, and now single digits in 2012. Shipments of aluminum in the third quarter grew to 1.317 million metric tons, versus 1.305 million in the second quarter, and 1.277 million in the first quarter.

Two of the strongest segments going forward for Alcoa are aerospace and automotive. The company's lightweight materials are being added to cars and planes, as companies look for ways to increase fuel efficiency. Alcoa sees the demand for aluminum in the aerospace sector to increase 13-14%. Alcoa also sees an increase in packaging (+2-3%), commercial building and construction (+2.5-3.5%), and industrial gas turbines (+3-5%). The only area where Alcoa sees a decrease is the heavy truck and trailer segment (-7 to -9%).

Here is a look at the company's after tax operating income by reporting segment:

· Alumina: $-9 million

· Primary Metals: $-14 million

· Global Rolled Products: $98 million, a 63% increase from the prior year

· Engineered Products and Solutions: $160 million, a 16% increase from the prior year

Alcoa trades with a reasonable debt to capital of 36.1%, and has $1.4 billion cash on hand. The company did post negative free cash flow of $39 million in the quarter, but it was during the company's traditional weakest quarter.

Shares of Alcoa have traded between $7.97 and $11.66 over the last 52 weeks. The company has been hit hard by a decline in the price of aluminum, along with weakened demand from China. Shares are now down over 76% in the last five years. Alcoa shares traded for over $40 back in 2008.

Alcoa shares look attractive at these levels. The company trades with a price to sales ratio of 0.40, and a price to book ratio of 0.72, based on book value of $12.75 (Yahoo Finance). Estimates call for the company to post earnings per share of $0.25 for the fiscal year. Alcoa has now reported earnings per share of $-0.04, $0.05, and $0.03. The following year, analysts see Alcoa posting $0.72 in earnings per share. Shares are not going to $40 anytime soon, but do look like they could hit new 52-week highs by the end of the fiscal year based on low valuations on sales and book value.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AA over 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.