Alcoa's Down but Not Out

NEW YORK (TheStreet) -- To say it's been a bad year for Alcoa (AA) would be a gross understatement.

Not only is the company's stock trading at near 52-week lows due to a brutal aluminum pricing environment, but the aluminum giant -- considered the "lead-off hitter" in each earnings season - was recently downgraded to sell by Deutsche Bank analyst Jorge Beristain, who also lowered his price target to $5.50.

Essentially, in the week Alcoa reports its third-quarter earnings results, Beristain believes the company, even at its 52-week low, is overvalued by 30%. To add insult to injury, Alcoa, long a Dow component, was recently booted out of the index.

As much as I've always liked this company and still do, I'm not going to make excuses for the company's performance or what Alcoa has become. But I disagree with those who consistently expect Alcoa to somehow manufacture growth out of thin air, especially when global demand for aluminum just isn't there.

While Beristain is justified in reducing his earnings estimates and price outlook for aluminum by 12% to 13% for 2014 and 2015, Alcoa's management has always remained upbeat about the company's prospects, saying recently it expects 7% demand growth in aluminum for this fiscal year. This outlook was 1% better than what the company guided for all of 2012.

So, while there is still plenty of doom and gloom out there being spewed among Street analysts, it shouldn't be discounted that the company's recent investments in areas like China have begun to pay meaningful dividends. In fact, management expects China to account for roughly 50% of its projected demand growth.

Besides, it's not as if the company's recent results have swayed that drastically from prior guidance or what the Street has expected. Take, for instance, the June quarter. Aloca posted revenue of $5.85 billion, which beat Street estimates of $5.82 billion. Remarkably, the beat arrived even as sales slipped by about 2%.

Here, again, soft production shipments had a considerable impact on the company's performance. But even with the perpetual weak prices of aluminum, Alcoa's management continues to make the best of a bad situation. It's true that "looking on the bright side" has been a recurring theme. But even though the Street expects Alcoa to post a 2% decline in revenue on Tuesday, I don't believe the poor aluminum industry is a valid reflection of how well-managed Alcoa really is.

That said, I won't begrudge anyone who has held on to this stock faithfully for turning bitter. But given Deutsche Bank's recent downgrade and Alcoa's banishment from the Dow, investors should separate the company's absolute performance from the industry's persistent struggle. I believe this is the only way to truly appraise Alcoa's underlying value.

Likewise, investors should begin to put just as much emphasis on Alcoa's segmental performances as they do on revenue growth and aluminum demand. Unlike most, I'm not holding my breath expecting better revenue growth and a spike in aluminum pricing. While there have been some slight improvements over the past couple of year, there aren't going to be any miracle's here.

With that in mind, I believe the only way to assess the company's near-term performance, aside from improving cash flow, is to dissect Alcoa's after-tax-operating-income (ATOI) results from within the company's segmental performances. On Tuesday, investors should look for a meaningful climb in not only earnings per share, but also adjusted Ebitda margin.

Even if Alcoa's revenue decline by the expected 2%, if the company shows any improvement in ATOI and adjusted Ebitda along with lower operating expenses, what you will then find is that even amid the sluggishness, management still figured out ways to increase the overall value of the company.

So, while I do respect Deutsche Bank's opinion, I would still be a buyer here on any dip seen in this stock.

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

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

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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