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TheStreet Open House

Alcoa Is Misunderstood

NEW YORK ( TheStreet) -- I don't always talk about industrial stocks, but when I do, I prefer Alcoa (AA). And that's because Alcoa is the most interesting company in what has been a brutal industry -- aluminum -- over the past couple of years.

During that period I've been beating the patience drum to anyone who would listen and detailing the prospects of not only a recovery in the price of aluminum but of the value that remains in Alcoa's stock.

I won't argue that my optimism has yet to translate into meaningful results. But Alcoa's management continues to make the best of a bad situation.

Although the management team does have a strong track record of solid execution, that doesn't mean it is able to manufacture growth out of thin air.

Investors disagree. After the company posted a 3% revenue decline in April quarter, shares of Alcoa dropped by as much as 8% in the sessions that followed. This is even though rivals like BHP Billiton (BHP) posted revenue declines of more than 14%.

With fiscal second-quarter earnings due out Monday, I believe it's time to reshift our focus on Alcoa's performance. I won't disagree that revenue growth is important. But I also don't expect a significant year-over-year improvement, either. Analysts are expecting second-quarter sales to come in flat to lower by as much as 20 basis points.

Truth be told, it would surprise me if the company posted any positive sales growth at all. Don't mistake this for a knock on the company's ability. But after watching the sluggish nature of this industry for more than three years, I think it's now important for investors to lessen their focus on aluminum demand and start appraising Alcoa more on its segmental performances -- particularly its respective after-tax-operating-income (ATOI) results.

Case in point: Although first-quarter revenue declined 3% in the April, the Street discounted how well Alcoa actually performed in first-quarter earnings-per-share, which produced the company's best ever quarterly ATOI of $137 million.

This is while the company posted an adjusted EBITDA margin of 21%. What this means is that amid the revenue struggles, management has figured out ways to still increase the value of the company, while curtailing operating expenses at the same time.

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