Earnings Bring Hope for Alcoa's Troubled Stock

It's been a bad year for aluminum producer Alcoa's (NYSE: AA  ) stock.

Shares of this member of the Dow Jones Industrial Average (DJINDICES: ^DJI  ) have plunged more than 8% since the start of 2013, and current worldwide trends aren't giving investors anything to feel optimistic about. Now with earnings season coming around again, analysts everywhere have a chance to see just how Alcoa's managing the tough times in the industrial sector.

With the numbers in the books, did Alcoa live up to expectations?

Hits and misses
First, the news: Analysts had projected earnings per share of $0.10 for the struggling company, and Alcoa managed to beat that number by a hair. The company reported $0.13 in EPS -- $149 million in net income -- for the first quarter; even without one-time items, Alcoa still beat expectations by a cent, with an EPS result of $0.11. That's a year-over-year gain of $0.01, compared with last year's $0.10 adjusted EPS mark.

Unfortunately, the company's revenue didn't make the grade in the first quarter. Alcoa reported revenue of $5.8 billion, just missing analyst projections of $5.9 billion. That mark fell 3% year over year, a casualty of a weak aluminum market that hasn't managed to find its footing in 2013.

Investors haven't liked what they've seen so far: In after-hours trading, Alcoa's stock has fallen more than 1%. So which story should you buy -- or sell? Is Alcoa slipping and sliding with its falling revenue, or is it slowly digging itself out of the hole made by the sluggish global economy?

What's bad, what's good
Make no mistake: Alcoa's still facing plenty of trouble. Commodity prices across the mining and metals sector have beaten a hasty retreat in the recent past. Alcoa's hardly been the only company affected. Among fellow aluminum producers alone, rivals Rio Tinto (NYSE: RIO  ) and BHP Billiton (NYSE: BBL  ) have felt the blow of depressed prices. The latter's revenue dove by 14% in the last half of 2012 as low commodity prices took a bite out of sales; Rio Tinto's desperately trying to slash costs after recording a full-year loss.

Prices were mainly responsible for Alcoa's dipping revenue today, although the company's reduced production in Europe didn't help. That latter point is a good thing for Alcoa's long-term future, however: With growth so stagnant in Europe, continuing to commit resources to a pointless expenditure would only drag on tomorrow's earnings. Better to bite the bullet today and hope more promising markets pay off, such as if China emerges from its recent slowdown and picks up infrastructure spending.

However, signs of hope point toward a light at the end of this tunnel. Volumes have picked up in Alcoa's downstream business, compensating for lower prices with increased production. It's a temporary measure to stabilize revenue and earnings, but if prices ever pick up, that trend will send Alcoa's earnings higher and higher. The downstream business represents more than 70% of the company's after-tax earnings; investors should hope for even more volume growth here in the future.

Alcoa still expects 7% growth this year. Higher margins and operating income reported today from its engineered products and solutions business and global rolled products division should help the company achieve that goal. Engineered products will probably remain Alcoa's workhorse, as selling parts and materials to manufacturers such as automobile firms and aerospace companies will take advantage of these industries' gains.

What does this mean for Alcoa's stock? Don't expect the turnaround immediately. Prices will continue to remain low as Chinese production of  aluminum continues to grow and inventory remains high, and engineered products won't be able to make up all that ground in just a few quarters.

For the long-term investor, however, the good from today's earnings outweighs the bad. Increased downstream volume and improving performance from key divisions bode well for Alcoa's future. This company's on the right track, even if it is a slow track, to digging its stock out of the red. For investors, patience and a healthy long-term view are the right approaches with this pick.

Should you have faith in this growth story?
Materials industries are traditionally known for their high barriers to entry, and the aluminum industry is no exception. Controlling about 15% of global production in this highly consolidated industry, Alcoa is in prime position to take advantage of growth that some expect will lead to total industry revenue approaching $160 billion by 2017. Based on this prospect and several other company-specific factors, Alcoa is certainly worth a closer look. For a Foolish investment perspective on this global giant simply click here now to get started.


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