Firth, the world's largest supplier of seamless rings for aero-engines, provides Alcoa an additional source of revenue with its rings and metal products business. And Firth, which also has capabilities in specialized isothermal technology, uses no aluminum in its products, giving Alcoa a level of diversification that is unmatched by any other company in the industry.

All told, what was once considered just a "good idea" by market observers is now being demonstrated in Alcoa's actual numbers. The company's second-quarter results, which beat both revenue and profit estimates, show that Alcoa has separated itself from commodity aluminum production and all of the burdens that came with it.

But the growth has only just begun.

Consider this. Aside from the 60% revenue growth Alcoa expects from Firth's business in the next three years, aluminum pricing has begun to show more stability. In my opinion, on a year-over-year comp basis, Alcoa's aluminum business was actually the standout performer in Tuesday's results.

Despite management diligently cutting costs in the aluminum business, the aluminum swing to a profit of $97 million (from a $32 million loss) was unexpected. This means that Alcoa, which projects global aluminum demand to remain at 7%, now has the best of both worlds.

After shutting down high-cost smelters in Brazil last year, Alcoa doesn't appear ready to give up. And it's for good reason. The company announced that it has opened a new smelter in Saudi Arabia, calling it "the lowest cost aluminium production facility in the world." This means that investors can expect continued improvement in profitability of aluminum production too.

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

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates ALCOA INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate ALCOA INC (AA) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. Among the primary strengths of the company is its solid stock price performance. At the same time, however, we also find weaknesses including deteriorating net income, disappointing return on equity and weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Compared to its closing price of one year ago, AA's share price has jumped by 90.38%, exceeding the performance of the broader market during that same time frame. Although AA had significant growth over the past year, our hold rating indicates that we do not recommend additional investment in this stock at the current time.
  • AA, with its decline in revenue, underperformed when compared the industry average of 4.5%. Since the same quarter one year prior, revenues slightly dropped by 6.5%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • ALCOA INC has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has reported a trend of declining earnings per share over the past two years. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, ALCOA INC swung to a loss, reporting -$2.15 versus $0.17 in the prior year. This year, the market expects an improvement in earnings ($0.45 versus -$2.15).
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Metals & Mining industry and the overall market, ALCOA INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Metals & Mining industry. The net income has significantly decreased by 219.5% when compared to the same quarter one year ago, falling from $149.00 million to -$178.00 million.

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