Why Alcoa Is a Buy Ahead of Earnings

Tickers in this article: AA BA F GE
NEW YORK ( TheStreet) -- The economically sensitive business of aluminum has taken a significant toll on Alcoa (AA) . Despite the company's strong fundamentals, the struggles caused by weak aluminum prices have been too much for Alcoa to overcome. But better days are ahead.

Not only does the company expect a 6% rebound in demand for aluminum, but the stock is currently undervalued relative to long-term growth potential. And with the company expected to report on its fourth quarter on Tuesday, investors would do well to buy the stock ahead of a market still filled with doubt.

The company is expected to post earnings of 6 cents per share, which is 1 penny lower than estimates from three months ago. Revenue is expected to arrive at $5.64 billion. Although pessimism among analysts remains, investors have begun to realize that the situation for Alcoa can't possibly get any worse.

For instance, in its third-quarter report, the company posted a loss of $143 million from continuing operations. This included a payout from an environmental lawsuit totaling $175 million. When excluding one-time items, its earnings reached $32 million or 3 cents per share.

Despite the difficult macro climate, the company still managed to generate $5.8 billion in revenue -- better than analysts' estimates of $5.54 billion. The prolonged weakness in the price of aluminum, which has declined by 5% from since the second quarter and by 17% annually, has hurt its revenue growth.

However, that Alcoa was able to beat on both its top and bottom lines shows how the company continues to make the best out of a bad situation. And its commitment toward return value to shareholders can't be understated. And it seems that investors have begun to appreciate this fact as shares have risen over 14% off the mid-November lows.

During the conference call, investors should expect more clarity regarding aluminum prices and the outlook for the year. Management has maintained the 6% and 7% improvement in demand for most of 2012. A slight uptick would be a welcome signal.

Management also have spoken favorably about the automotive and aerospace industries where companies such as Ford (F) and Boeing (BA) have started to migrate toward using aluminum in their vehicles and jets.

This has been in addition to projecting significant improvements in other areas of it business, which includes gas turbine markets, food packaging and commercial transportation. Likewise, there are also plenty of growth opportunities in areas such as appliances where names such as General Electric (GE) might become a significant consumer of aluminum.

Ahead of the report, the stock looks incredibly cheap. But as I've said before, unless aluminum prices recover, we may be repeating this for the next several quarters. Alcoa today has considerable amount of value, but it requires a lot of patience for that value to be realized.