Alcoa Continues to Make the Best Out of a Bad Situation
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
You will be hard pressed to find a management team today that deserves more credit than the group at aluminum giant Alcoa (NYSE: AA). Though the aluminum business is still perceived today as having bad economics, it seems that investors continue to make the mistake of also discounting the brilliance of a sound management team. For quite some time now, the company has held the distinction of being the “leadoff hitter” in the earnings-season lineup. On Tuesday, the company did what it had to do to get on base.
The quarter that was
On Tuesday, Alcoa reported a loss from continuing operations of $143 million, or $0.13 per share. This included a payout from an environmental lawsuit totaling $175 million. The company would have earned $32 million, or $0.03 per share, excluding one-time items. Essentially, the company beat on its bottom line, as consensus estimates were calling for flat EPS, even though it posted $0.15 per share in the same period of a year ago.
Revenue for the quarter arrived at $5.8 billion. While that number was better than analysts’ estimates of $5.54 billion, it did represent a drop of 9% annually. The revenue dip owed to the prolonged weakness in the price of aluminum, which has declined by 5% from the previous quarter and by 17% annually.
Despite significant market turmoil, the company continues to turn in one solid performance after the other. Its upstream business logged impressive improvements, delivering almost $100 million of aggregate growth across its various segments, which include Alumina and Primary Metals. Management figured out ways to offset sustained cost concerns with improvements in price and mix as well as productivity gains.
Clearly, this was a case of making the best out of a bad situation. Essentially, as the market continues to focus on much of the headwinds facing Alcoa, such as the relatively poor performance of the alumina business, management remains focused on what it can do to produce growth and generate value for shareholders. But will one good quarter extinguish investor concerns?
Wall Street wants to know what the company can do to maintain this momentum and (more importantly) get aluminum prices going again. Understandably, only then will analysts curb their pessimism. But the company’s management continues to show confidence in the business, and expects demand to continue to grow as the year progresses – particularly in the aerospace and automotive sectors.
The company also anticipates improvements in packaging, commercial transportation, and gas turbine markets, while forecasting that global aluminum demand will continue to grow to 6% over the next several quarters and into 2013. In the past, the company has been hurt by a subpar cost structure, and by failing to capitalize on growth opportunities. These recent earnings results suggest that Alcoa just might have turned the corner. But will it be enough to light a fire under the stock?
I see Alcoa’s shares as being significantly undervalued by at least 15%. What’s more, though the market may wish to discount the stock today, the current long-term fundamentals of the aluminum market look much better than what Alcoa’s current valuation presumes. From that standpoint, I have to think it’s an attractive buy – one that I expect will reach a new 52-week high by the end of this fiscal year.
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