After missing expectations for year-end 2005, Alcoa (NYSE:AA) came roaring back in the first quarter of this fiscal year, trouncing analysts' profits predictions. As we head into the weekend, Wall Street has even higher hopes for Alcoa's Q2 2006 earnings news, due out on Monday.

What analysts say:

  • Buy, sell, or waffle? Eighteen analysts follow Alcoa, and fully two-thirds of them are bullish on the shares. Of the remainder, five say hold, and only one counsels selling.
  • Revenues. Analysts will be looking for 18% revenue growth next week, for a total of nearly $8 billion in sales.
  • Earnings. Profits are expected to rise nearly 85% year over year, to $0.85 per share.

What management says:
Alcoa CEO Alain Belda cited a slowdown in the cost increases of raw materials, along with company "restructuring and efficiency initiatives" as contributors to the firm's earnings blowout last quarter. In all, the cost of goods sold by the firm as a percentage of sales declined year over year. On the top line, Belda highlighted the company's sales to the aerospace and commercial transportation markets as being "particularly robust."

What management does:
The reversal in raw-materials pricing helped Alcoa reverse a long-term slide in its gross margins last quarter, bringing the rolling average gross margin nearly back to where it had been a year earlier. The situation was similar with operating margins, and the company's rolling net margin hasn't been this high in 18 months.

Margins %

12/04

3/05

6/05

9/05

12/05

3/06

Gross

20.5

20.2

19.7

19.1

18.9

20

Op.

9.9

9.8

9

8.5

8.2

9.6

Net

5.6

5.1

5.2

5

4.7

5.8
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Alcoa cites analyst projections of global aluminum consumption doubling in volume over the next 15 years as justification for making additional investments in its business. Last quarter, the firm spent nearly $600 million on capital expenditures, of which almost two-thirds was "expansion capex" -- optional capital expenditures in addition to the spending necessary just to keep the machines oiled and the factories humming.

As a result of these investments in its future, Alcoa's "cash profits" have begun to diverge from the net income numbers it reports under generally accepted accounting principles. Over the past four quarters, the firm reported GAAP profits of $1.6 billion. Meanwhile, free cash flow dried up and reversed, yielding cash outflows of nearly $700 million for the same period.

Historically, however, Alcoa has generated both accounting and cash profits. So although Foolish investors often instinctively shun cash-burning enterprises, in Alcoa's case, I suspect the investments will pay off.

Competitors:

  • Alcan (NYSE:AL)
  • Norsk Hydro (NYSE:NHY)

Customers:

  • AmBev (NYSE:ABV)
  • Embraer (NYSE:ERJ)
  • Reliance Steel (NYSE:RS)
  • Worthington (NYSE:WOR)

What's free cash flow, and why do we care about it if GAAP is already so gosh-darn generally accepted? Find out in our "Foolish Fundamental" primers on GAAP and free cash flow.

Embraer is a Motley Fool Stock Advisor pick. Discover more of Tom and David Gardner's favorite stocks with a free 30-day guest pass.

Fool contributor Rich Smith does not own shares of any company named above.