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Alcoa: Not Going Anywhere For a While

NEW YORK ( TheStreet) -- When it comes to aluminum giant Alcoa (AA - Get Report) and deciding whether to invest, I think the most important factor involves having to first answer how long I am willing to wait, since there is no question that at $8 the stock is considerably undervalued from its true potential. Upon the release of its second-quarter earnings results, I'm realizing it's time for a Snickers bar, because it may not be going anywhere for a while.

More of the same
After having had some time to dissect the earnings report, I couldn't help but notice we've been down this road before. While the company logged a small beat when compared with what analysts were expecting, these same analysts also spent most of the quarter revising their estimates lower, and just one month ago several were expecting earnings per share to arrive at 9 cents and a year ago estimates were as high as 38 cents. This was also the case for its Q1 report. So while it is a beat nonetheless, a bit of perspective goes a long way.

As far as the report goes, for the quarter, the company generated revenue of $5.963 billion and EPS of nothing. The company did however log 6 cents EPS when excluding special items -- topping analyst estimates of 5 cents per share. The company is still feeling the effects of double-digit annual declines in aluminum prices. These have hurt its gross margins and operating earnings, which fell by 7 points and 77% respectively.

Moving forward
It seems Wall Street remains unimpressed and refuses to credit the company for not only managing a difficult aluminum market but also continuing to make productivity improvements. The fact is, though the aluminum business is still perceived today as having bad economics, the current long-term fundamentals of the market looks much better than the discount being applied. The company's CEO, Klaus Kleinfeld, seems to share in that sentiment when during the announcement he offered the following:

"Alcoa maintained revenue strength and solid liquidity by driving high profitability in our mid and downstream businesses and by reducing costs and improving performance in our upstream businesses. Although aluminum prices are down, the fundamentals of the aluminum market remain sound, with strong demand and tight supply, and Alcoa is successfully capitalizing on accelerating demand in high-growth end markets such as aerospace and automotive."

It is always a welcome sign to get such reassurances from a company despite such headwinds. And for that I have to say that I appreciate Mr. Kleinfeld for showing such confidence in not only his business but also the overall prospects of the aluminum industry. I just don't see smart companies making promises about things they aren't prepared to back up just for the same of putting undue pressure on themselves.

The company's management deserves some credit here for what I can see as having made the best of a bad situation -- particularly by focusing on its downstream business, where it showed a considerable amount of improvements. What has hurt the company in the past was a less than stellar cost structure and failing to capitalize on growth opportunities. Will these improvements be enough to light a fire under the stock? At this point I don't think so.

Bottom line
Having said that, I still see Alcoa's shares as being severely discounted to its true potential by at least 20% over the next six to 12 months. Value investors should take this as an opportunity to get in on a good company facing some headwinds at the moment but with a solid history of performance. Though the market may wish to discount the shares, investors can feel reassured that the company's management appears focused on what it can do to produce growth and generate value for shareholders. But have your Snickers bars ready -- it's going to take some time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

At the time of publication, the author was long AAPL and held no positions in any of the stocks mentioned.

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