Will Alcoa's Aluminum Shine for Investors?

NEW YORK ( TheStreet) -- With aluminum giant Alcoa ( AA) due to report first-quarter earnings on Monday, investors are stuck trying to figure out whether the stock is a value play or a trap.

This is not an easy question to answer given the state of the aluminum industry, which has been hurt over the past year due to low prices. But that's not to say realizing value is impossible.

When comparing Alcoa's current share price to its historical norms, the stock is cheap. But that only meets one requirement. While management has done a great job of making the best out of a bad situation, it remains unclear when aluminum prices are going to pick up again.

Placing a bet on Alcoa here will require patience. But if the company's recent performance serves as indication, investors will be rewarded. The Street is expecting earnings to arrive at 8 cents to 10 cents a share. Meanwhile, revenue is expected to decline slightly to $5.9 billion, down from $6 billion last year.

Ordinarily, this would be a concern. But again, this is not a company-specific fundamental problem. Alcoa has overcome low expectations each of the past couple of quarters, despite an 8% revenue decline in the fourth quarter. The issue is with soft production shipments.

The company still managed to beat Q4 Street estimates. Likewise, profitability improved significantly. Net income arrived at $242 million, or 21 cents a share -- exceeding the net loss of $191 million, or 18 cents a share in the year-ago period.

What's more, gross margin advanced 4% and the company posted a 200% surge in operating income, aided by the sales of the Tapoco Hydroelectric Project facility, which generated a gain of $161 million after taxes.

More than anything else, this type of performance is why the company's management stands out. As I alluded to above, although the aluminum prices may not immediately rebound, the company is still in great hands. In that regard, Klaus Kleinfeld, Alcoa's CEO said:

"Alcoa hit record profitability in our mid and downstream businesses, and continued to drive efficiency in our upstream businesses in the fourth quarter, all while cutting debt and maintaining our cash position. We overcame volatile metal prices and global economic instability to deliver on our targets for the fourth year in a row. We enter 2013 in a strong position to maximize profitable growth."

Kleinfeld's confidence was manifested in the company's outlook. Alcoa anticipated 7% growth in aluminum demand for 2013. While this was a 1% increase above 2012 guidance, the company also said that China is expected to account for roughly 50% of that growth.

The company's going to need it, especially since analysts have trimmed estimates due to slumping aluminum prices, which have fallen by 10 cents per pound over the past month. However, management has remained positive and Alcoa continues to speak favorably about the automotive and aerospace industries, where companies such as Ford ( F) and Boeing ( BA) have started to migrate towards using aluminum in their vehicles and jets.

Management has also projected significant improvements in other segments, including gas turbine markets and food packaging. Likewise, there are also plenty of growth opportunities in areas such as appliances, where names such as General Electric ( GE) might become a significant consumer of aluminum.

All of this means the company needs more time to execute. For now, the stock looks incredibly cheap. But as I've said before, unless aluminum prices recover, we may be repeating this theme for the next several quarters. Alcoa today has considerable amount of value, but it requires a lot of patience for that value to be realized.

At the time of publication, the author held no position in any of the stocks mentioned.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.