The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.NEW YORK (TheStreet) -- It always amuses me to watch Wall Street analysts back-peddle from bearish comments made about companies that never really deserved to be doubted in the first place. Warren Buffett once said that when a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. This has always been an axiom to which I've subscribed and one that has proven to be true time and time again. Except recently (to my amazement) it has proven to not be so and it was indeed the reputation of the management team that trumped the perceived poor status of the business' economics. In disappointing fashion, Wall Street still refuses to give credit where credit is due.
Making the best out of a bad situationAlcoa surprised Wall Street by reporting a first-quarter profit of $94 million - representing an increase of $287 million from the previous quarter. The company said that the solid results were attributable to not only key improvements in productivity, higher aluminum prices but also significant improvements in volume and mix. The company demonstrated noteworthy sequential revenue growth in end markets which includes commercial transportation, automotive, industrial products as well as packaging. Enron 10 Years After -- From Bad to Worse >> Net income arrived at $105 million or 10 cents per share while also topping revenue estimates by 9%. "Performance rebounded strongly this quarter due to our proactive cash sustainability actions, our relentless focus on profitable growth, and stabilizing markets," Alcoa CEO Klaus Kleinfeld said. These solid results also served to break a recent string of earnings per share disappointments for the company to the extent where it had not reported a surprise on its bottom line since April of 2011. Clearly this was a case of making the best out of a bad situation. But the question is, what can the company do to maintain this momentum and get aluminum prices going again? I think only then will analysts lower the eye of pessimism. 10 Stocks That Fidelity Funds Are Buying >>
Looking aheadAlcoa said that it expects demand to continue to grow as the year progresses -- particularly in the aerospace and automotive sectors. The company also anticipates improvements in packaging, commercial transportation as well as gas turbine markets while forecasting global aluminum demand to grow by at least 7% in 2012 -- this is on top of the 10% increase seen in 2011. Essentially as the market continues to focus on much of the headwinds such as the relatively poor performance of the alumina business, management's focal point remains on what it can do to produce growth and generate value for shareholders. Investors have to remember that companies don't go out of their way to make promises that they don't intend to keep -- especially when it is understandable that Wall Street expectations have already been lowered due to business economics. What I have found impressive in all of this is that analysts continue to present Alcoa with an "easy out." But remarkably, the company continues to say, no thank you. 10 Stocks That Could Rise in Market Decline >>
Bottom lineIt seems that Wall Street remains unimpressed and refuses to credit the company for not only managing a difficult aluminum market but also continuing to make productivity improvements. The fact of the matter is, though the aluminum business is still perceived today as having bad economics, the current long-term fundamentals of the market looks much better than the discount currently being applied today. From that standpoint, I see Alcoa's shares as being significantly undervalued by at least 20% below its most recent closing price. And it doesn't hurt to know that the company is under the careful watch of a management team with a reputation for brilliance.
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