Alcoa Still Making Best of Bad Situation

Richard Saintvilus

NEW YORK ( TheStreet) -- "Making the best out of a bad situation" seems to be the recurring theme for Alcoa , which has had a difficult time overcoming a weak aluminum pricing environment. Heading into the company's first-quarter report, there's been plenty of frustration about the lack of movement in the stock. However, some perspective is necessary.

While management does have a strong track record of solid performances, they are not magicians. At least not to the extent that they can manufacture demand out of thin air. Besides, it's not as if Alcoa has been outperformed by rivals like Commercial Metals , either. To that end, given Alcoa's solid fiscal first-quarter results, the company deserves some more time.

Good Start to the Fiscal Year

Given the state of the aluminum industry, the Street wasn't expecting a heck of a lot from Alcoa. Although the results were far from robust, management nonetheless demonstrated progress. This is despite posting revenue that fell short of estimates. But the company reported an increase in quarterly profits on the strength of its primary metals and alumina segments.

Net income arrived at $149 million, or 13 cents a share. This compares favorably to net income of $94 million, or 9 cents per share the company earned a year ago. When excluding items, the company posted earnings of 11 cents per share, which was a penny higher year over year.

Granted, these were not great numbers when compared to Alcoa's historical performances. Soft production shipments had a considerable negative impact. And as noted, the mediocre prices of aluminum didn't help. Nonetheless, the company still managed to beat Street EPS estimates. Analysts were expecting 8 cents a share.

What's more, although consensus estimates had come down from 10 cents per share, Alcoa still would have logged a beat. But revenue was a different story -- dropping 3% year over year to $5.83 billion. But the miss was only marginal in terms of expectations. The Street was calling for sales of $5.88 billion -- essentially, the margin of the miss was less than 1%. In this environment, that should count as a beat.

Moving Forward

Growth has not come in sufficient quantities. But management remained upbeat about the company's prospects, saying that it expects 7% demand growth in aluminum for the fiscal year, consistent with Q4's guidance. Equally important was that management remained very confident about the aerospace and automotive sectors, which was previously guided for 10% and 4% growth, respectively.

The good news is, there wasn't much deviation from these projections, even though revenue arrived softer than expected. This is also encouraging because it maintains the growth potential from companies such as Ford and Boeing that have started to use more aluminum in their vehicles and jets. But there are other growth opportunities.

Along with the company's strong packaging business, investors should be encouraged with the building/construction and industrial gas turbine segments that are both projected to grow at a rate of 5%. Likewise, demand could be on the way in areas such as appliances where names such as General Electric might become a significant consumer of aluminum.

Plus, when Alcoa reported on its fourth quarter, management had indicated that it expected China to account for roughly 50% the company's projected growth. While management is betting big on the Chinese economy, during the first-quarter conference call, this time the company spoke favorably about Europe. It's certainly encouraging that one of the most fiscally troubled regions is picking up strength. All of which points to a solid rest of 2013 for Alcoa.

Bottom Line

While there are still weaknesses in this business, it's hard to argue that this was an excellent quarter given the factors that management has had to work with. Productivity gains amid such a brutal aluminum pricing climate were also impressive. More importantly, management remains committed towards returning value to shareholders. And based on Alcoa's performance and growth outlook, investors should be optimistic about the company's future.

At the time of publication, the author held no position in any of the stocks mentioned.

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