Alcoa (NYSE:AA) kicked off earnings season this week reporting its fourth quarter numbers after markets closed on Tuesday. The aluminum giant reported solid numbers and answered several key questions on the minds of investors.

The numbers game
Earnings came in at $0.06 a share for the quarter and $0.21 for the full year, which was roughly what analysts were expecting. Over the past month, more than a third of the analysts covering the company had reduced their expectations so it was important for the company not to disappoint. Alcoa also reported solid free cash flow of $535 million for the quarter as the company did a good job turning sales into cash flow.

Where Alcoa really excelled was on the revenue side. Analysts were looking for $5.6 billion in sales for a year-over-year decline of around 6%. Instead the company reported revenue of $5.9 billion, which was just a 1.5% decline over last year. For the full year the company had sales of $23.7 billion, down 5% from 2011 due to lower aluminum pricing. Despite the declines, these numbers were better than analysts were expecting.

The aluminum outlook
What really excited the market was Alcoa boosting its aluminum demand forecast for 2013. The company now sees demand growing by 7%, a bit ahead of the company's previously guided growth rate of 6.5%. This puts demand ahead of the pace necessary to see it doubling worldwide from 2010 to 2020. In 2013 demand will be strong for aluminum in aerospace, building and construction, and the industrial gas turbine market.

Alcoa CEO Klaus Kleinfeld also noted in an interview with CNBC that his company especially is seeing demand in China coming back. He thought that the company's GDP growth rate would be more than 8% over the next year. A big potential driver for this bullish outlook is China's recently announced $150 billion infrastructure stimulus plan.

Another positive for industry profit margins are worldwide capacity reductions. Over the past year Alcoa has taken 531,000 metric tons of smelting capacity offline to improve its competitive position. Others in the industry, such as global mining giants Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP), have either canceled plans to expand capacity or written down assets due to overall weaker market demand. Both companies are exploring aluminum asset sales or further capacity reductions to boost margins.

Moody's needs to review its review
About a month ago, Moody's placed Alcoa's debt under review for a possible downgrade to junk. Moody's noted that it does "not see a material, sustainable improvement in aluminum prices over the next several quarters and expect Alcoa's earnings performance and debt protection metrics to remain challenged." Not only does Alcoa differ on the outlook for the aluminum market, but the company said its balance sheet is in its best shape in years.

The company boasts a strong liquidity position with $1.9 billion of cash on hand against $8.8 billion of debt. Its net debt to capital ratio is 27.5%, with a net debt balance that's the lowest it's been since 2006. The company has taken action to manage its debt maturity schedule and it noted that, other than its 2014 convertible debt, it has just $422 million of debt maturities over the next four years. In contrast to Moody's assessment, the company sees its balance sheet as an area of increasing strength.

Bottom line
Alcoa is operating very well in these challenging global economic times. The company is sees better days ahead for aluminum demand as China's economy doesn't appear to be slowing as fast as once feared. There's a lot to like with Alcoa for those with a longer-term view.

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