Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope....

President Donald Trump's trade war with China has been largely bad news for a number of stocks, but for one company in particular -- Alcoa (NYSE:AA) -- that trade war pales in comparison to the "trade peace" with Canada and Mexico.

It's been nearly four months since the Trump administration announced it was lifting tariffs on steel and aluminum imports from America's neighbors to the immediate north and south. In the months following that announcement, shares of Alcoa lost as much as 32% of their value -- part of the stock's roughly 50% decline in value over the past year.

Alcoa's share price has been slowly climbing in recent weeks, however. And one announcement today could help to maintain that uptrend as we move toward next month's Q3 earnings release. Here's what you need to know.

Rolled aluminum stacked up against a blue sky

Image source: Getty Images.

Upgrading Alcoa

Early this morning, analysts at investment banker Credit Suisse announced they're upgrading shares of Alcoa stock to an outperform rating, after the stock's 50% fall in price. They feel the shutdown of Alumina Partners of Jamaica ("Alpart," a Chinese-owned alumina refinery), announced last month, is likely to curtail global aluminum production at a time of "significant capacity cuts in China" and an "end to inventory destocking" globally.

At the same time, "key raw material inputs for alumina, caustic soda, energy, and calcined coke" are declining in price and boosting profit margin for Alcoa "significantly," even as London Metal Exchange prices for the metal remain "firm," Credit Suisse explained in a note covered on StreetInsider.com today.

And yet, despite all these positive developments, Alcoa shares today still sell for half what they cost a year ago, leaving the shares "significantly undervalued on most metrics," the analysts say.

But which metrics are these?

Valuing Alcoa

If you value Alcoa by its ratio of price to book value (0.8), for example, the stock actually looks significantly pricier than other well-known metals-makers such as ArcelorMittal (P/B of 0.4) or U.S. Steel (P/B of 0.5). Similarly, Alcoa costs more when valued on its price-to-sales ratio.

However, Alcoa can't be valued on price divided by its trailing-12-month earnings -- its price-to-earnings ratio, probably the most widely accepted valuation metric for profitable companies -- because over the past 12 months, Alcoa has not earned any profit at all. It lost $579 million instead.

And yet, a closer look at the company's numbers (helpfully provided by our friends at S&P Global Market Intelligence) reveals that much of this loss was "non-cash," and a result of around $430 million in restructuring charges deducted from earnings over the trailing 12 months. Credit Suisse believes that while these restructuring efforts have depressed earnings in the short term, they should provide "material tailwinds" to the company's free cash flow beginning early next year.

Valuing Alcoa on forward earnings, analysts see the stock as selling for only about 15.7 times next year's earnings, which doesn't seem excessive.

Indeed, the stock might even be cheaper than that.

Valuing Alcoa...on cash

Consider the company's cash flow statement, for example. According to S&P Global data, over the past year -- a year, remember, in which Alcoa has reported nothing but losses under generally accepted accounting principles (GAAP) -- Alcoa actually generated positive free cash flow of $685 million. Weighed against the company's market capitalization of $3.5 billion, and adjusting for net debt to arrive at its enterprise value, this leaves Alcoa stock selling for only about 10 times free cash flow, which doesn't seem expensive at all.

Granted, as with GAAP earnings, analysts are forecasting negative free cash flow for Alcoa by the end of this year. Next year's quarterly report should tell us whether that prediction is likely to be correct, or if Alcoa can maintain through the end of this year the strong rate of FCF production that it's exhibited so far. Either way, consensus forecasts for next year and for 2021 back up Credit Suisse's predictions of "material tailwinds" emerging, and $667 million in cash profit being collected next year (on par with trailing FCF), growing to $735 million in 2021.

Despite the weak GAAP earnings number, Alcoa is continuing to throw off impressive levels of cash despite the lifting of tariff protections against imports from Canada and Mexico. With the stock price still not reflecting that fact, Credit Suisse's upgrade today looks both timely and correct.