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Expectations Are Still High for Alcoa

NEW YORK ( TheStreet) -- Last year will likely go down as a year Alcoa (AA - Get Report) investors will love to forget. Not only did the company's stock wallow near 52-week lows for most of 2013 due to a brutal pricing environment, but the aluminum giant also lost its shine after being kicked off the Dow Jones Industrial Average.

How can we also forget that while the stock traded around $7.80 back in October, shares were downgraded to sell by Deutsche Bank analyst Jorge Beristain, who also lowered his price target to $5.50. Since then, the stock has soared nearly 35%. While "moral victories" aren't quantified in capital gains, I do believe that Alcoa management deserves a considerable amount of credit for having done more with less.

Today, even with shares closing Monday at $10.54, near the 52-week high, I believe the stock looks incredibly cheap. But as I've said on more than one occasion, it may be a while longer before aluminum prices return to their robust levels. The good news is, the worst is over. With Alcoa due to report fourth-quarter earnings Thursday, investors will be looking for hints of how management feels about the expected rise in global aluminum demand.

The Street will be looking for earnings of 5 cents per share on revenue of $5.43 billion, which would represent an 8% year-over-year revenue decline and continuing what we've seen as a weak top-line performance over the past couple of years. Chances are, this is also what investors should expect throughout the balance of 2014.

Accordingly, my price model for aluminum, which have been trimmed by 10% and 12%, respectively, for fiscal year 2014 and 2015, remains conservative. This, however, should not be considered an indictment on Alcoa or its management team. Unlike most, I don't expect Alcoa to manufacture growth out of thin air. Global demand for aluminum is isn't there yet.

The good news, though, is that Alcoa's management, which has always remained upbeat about the company's prospects, has maintained 7% demand growth in aluminum for this fiscal year, which was 1% better than what the company guided for last year. I believe another 7% demand growth target for all of 2014 will be encouraging.

For that matter, even if management were to project demand growth to, say, 6%, I don't believe investors should assume lack of confidence, either. It's not as if Alcoa has been outperformed by the likes of Commercial Metals (CMC) or Century Aluminum (CENX). What's more, even with operational deficits such as soft production shipments, Alcoa today still has considerable amounts of value. Investors just need to know where to look.

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