The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.



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(AA) - Get Alcoa Corp. Report

disappointed big-time Tuesday, with earnings missing forecasts by about 32%.

But investors should look past the earnings headlines and consider the merits of buying Alcoa stock right now, especially if they're buy-and-hold types.

Here's the news: Alcoa stock was trading down as much as 5.5% in after-hours trading Tuesday after the aluminum company reported profits of $172 million, or 15 cents a share, for the third quarter. That was well short of the 22 cents EPS forecast from Wall Street investment analysts.

But there are signs of life at Alcoa. The company posted sales of $6.42 billion, which topped forecasts of $6.24 billion. The company also affirmed a growth forecast of 12% for fiscal 2011, as well as reasserting claims that aluminum demand will double by 2020.

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Encouraging signs, to be sure. What's more, Alcoa exec Klaus Kleinfeld summed up Alcoa's bulletproof balance sheet very succinctly in the earnings conference call: "Alcoa is a confident company in a nervous world. We are well prepared for whatever lies ahead, with more cash on hand, lower debt and continued focus on profitable growth."

Kleinfeld is right. The company has $1.2 billion in cash on its balance sheet. It has more than $9 billion in total debt but $41 billion in assets.

The biggest headwind to Alcoa, of course, is that demand is weak and aluminum prices are soft. Aluminum prices fell about 12% in the third quarter, continuing a downward spiral that has weighed on AA stock and hurt margins for some time. Alcoa is off a gut-wrenching 33% year-to-date in 2011, and about 75% below the 2008 peak for AA stock prices -- currently around $10 from about $43 three years ago.

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But there are many reasons to think Alcoa is at or near a bottom and has adjusted to the tough market environment. The company has been profitable since the first quarter of 2010. The company has seen seven straight quarters of significant year-over-year growth in EPS and six consecutive quarters of big revenue growth over the previous year. Throw in decent numbers this quarter except for the profits, and you have some fairly good fundamentals behind Alcoa.

What's more, from a valuation standpoint Alcoa appears to be a screaming buy. The stock's forward price-to-earnings ratio is a mere 8.5. The five-year price/earnings-to-growth ratio is just 0.25. Price-to-book is 0.69. This stock is a heck of a deal by almost any measure.

When you also consider that aluminum prices and demand eventually will recover, you have a good long-term buy here.

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Of course, that demand recovery could be two years or three years or longer. And we all know that Wall Street is far from rational in the short term and will sell off good stocks at a moment's notice. So there might indeed be more troubles in store for Alcoa in the near future.But if you are looking for a long-term investment, you might not find many better bargains than Alcoa after the earnings over-reaction.

Jeff Reeves

is editor of As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via


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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.