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Is Alcoa Still Worth the Wait?

Tickers in this article: AA GE F BA
NEW YORK ( TheStreet) -- The challenge imposed by the tough economic climate has served as a disruption for even the most fundamentally sound businesses.

This reality makes it difficult to have anything but a dismal outlook for companies like Alcoa (AA) that are in economically sensitive businesses such as aluminum.

By and large, this has been what has kept investors at bay although Alcoa's stock remains undervalued from its true long-term potential. There's no question the stock will soon rebound because the economy is showing signs of improvement, albeit slowly.

But I wonder, how long should investors wait and will the patience pay off?

Doing More With Less

If nothing else, the company is consistent. Alcoa understands the challenge it faces and continues to execute as best as it can until circumstances improve. This was especially true upon dissecting the results of its third-quarter earnings report, which revealed another solid performance despite significant market turmoil.

Though Alcoa reported a loss of $143 million, this figure had little to do with its execution as it included a payout of $173 million stemming from a previous legal dispute. Excluding this cost, Alcoa actually earned $32 million, or 3 cents per share, enough to beat EPS estimates, which was expected to be flat.

Alcoa also beat on its revenue number, which registered at $5.8 billion -- topping estimates of $5.54 billion. That its revenue dropped year over year by 9% wasn't much of a concern considering the broader climate of the aluminum business, resulting in price declines of 5% sequentially and 17% year over year. Nonetheless, Alcoa was able to deliver close to $100 million of aggregate growth when combining all of its segments.

The improved performance was the result of the company's management figuring out ways to develop productivity gains, which helped offset cost concerns. But how long can the company pull a rabbit out of its hat without aluminum prices showing signs of a recovery? Betting on Alcoa at this point requires faith in the company's management being able to do more with less.

Moving Forward

Although things might look a little grim now, over the long term there are plenty of causes for optimism. Alcoa's management continues to show its belief in the aluminum business and fully anticipates that demand will pick up. Management also continues to speak favorably about the automotive and aerospace industries where companies including Ford Motor (F) and Boeing (BA) have started to migrate towards using aluminum in their vehicles and jets.

While forecasting demand growth of 6% over the next several quarters, Alcoa expects other areas of its business to see significant improvements. These include gas turbine markets, food packaging and commercial transportation.

Likewise, there are also plenty of growth opportunities in areas such as appliances where names including General Electric (GE) might become significant consumers of aluminum. Alcoa stands to benefit immensely once the market rebounds.

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