Aa Rolled
Source: Alcoa.

Ever since the financial crisis hit, investors have gotten used to volatility. But aluminum specialist Alcoa (NYSE:AA) has seen some of the most dramatic gains and losses of the past six years, losing 85% of its value in 2008 and early 2009 before nearly tripling over the subsequent two years. The stock's 2011 highs proved short-lived, though, as Alcoa went on to get cut in half once again before its explosive move higher in the past year. With all those volatile moves, investors want to know whether Alcoa can keep climbing from here or if the aluminum company is doomed to suffer another leg down. Let's look at three reasons why Alcoa could maintain its ascent.

1. Alcoa stock still trades at a fraction of its past highs.
Stocks have no memory of their past prices, and so many people see anchoring on past price levels as a mistake in investing. Yet people do have memories of where stocks traded before, and so it's always worth asking whether fundamentals could send a stock like Alcoa back to its past highs and beyond.

In 2006 and 2007, Alcoa earned between $2.50 and $3 per share, making its highs around $40 per share seem reasonable from an earnings-multiple standpoint. At this point, Alcoa has only recovered a portion of those lost earnings, with even optimistic investors seeing the aluminum company earn less than $1 per share next year. But in the coming years, many expect Alcoa to have a sustained push higher in its earnings, with 40% annual growth in earnings getting EPS back to the $2.50 to $3 level by 2018. That's a long way out, but if shareholders start anticipating that growth -- or if it comes faster than expected -- then those old $40 share prices might not look so crazy in the near future.

2. Margin expansion from Alcoa selling more value-add products would send profits soaring.
If Alcoa can get its earnings back up, its success will come from the high-margin side of the aluminum company's business. Aerospace is a multi-trillion dollar industry overall, and Alcoa has aimed squarely at getting its share of the aerospace pie. Its traditional focus on lightweight metal components will only get stronger with its pending acquisition of Firth Rixson, and Alcoa's partnership with Russian company VSMPO-AVISMA will add titanium production to its already impressive list of manufacturing capabilities. Boeing (NYSE:BA) recently signed another $1 billion agreement for Alcoa to supply aluminum sheet and plate materials for aerospace uses, further highlighting Alcoa's strong reputation among top airplane makers. At the same time, the automotive sector has also grown sharply, and Alcoa is providing ways for automakers to comply with tougher fuel-efficiency standards while maintaining safe and affordable operation.

Aa Overview
Source: Alcoa.

Customers are willing to pay up for that attractive combination of factors, and more importantly, Alcoa has recognized the value in value-add products. Already, Alcoa managed to send its net income margins positive last quarter, and while they haven't yet returned to 2006-2007 levels, gross and operating margins are at their highest levels since the financial crisis. By essentially doing component fabrication for its customers rather than simply selling them raw aluminum materials, Alcoa is capturing more customer dollars, and that bodes well both for revenue and profitability going forward.

3. Vertical integration will leave Alcoa less vulnerable to economic disruptions.
Despite the profit potential from value-add products, it's also important that Alcoa has secured its hold on the alumina raw materials market as well as midstream markets for items like rolled products. After years of supply gluts, many industry analysts now expect deficits in aluminum supply compared to projected demand, and that could put pressure especially on those producers that have to rely on outside sources for the raw materials they need for aluminum production.

In essence, Alcoa has invested in its future by shutting down smelter operations and taking the resulting near-term hit. Yet while peers Rusal and Rio Tinto (NYSE:RIO) have taken similar measures, Alcoa can be smarter about integrating its multiple strategic initiatives, diverting raw materials toward the higher margin value-add line when necessary while also providing lower margin but still important commodity materials for other customers. Having the built-in diversification of distribution channels at multiple points on the supply chain doesn't provide complete protection from potential problems. But the flexibility to meet whichever needs are most lucrative should put Alcoa in an enviable position going forward.

Alcoa has come a long way, but some think it can go even further. If any of these three positive factors comes to pass, it could easily be the catalyst for further share price gains for Alcoa in the coming years.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.