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Tickers in this Article: AA, AL, RTP
Alcoa's (NYSE:AA) recent earnings release marked the unofficial start of third-quarter earnings, as Alcoa is the first Dow company to report.

In a quarter where some analysts are predicting the earnings growth of the S&P 500 to dip into negative territory for the first time since 2002, Alcoa's numbers seemed indicative of the recent trends.

Alcoa earned 63 cents per share for the quarter, which includes the one-time gains from the sale of a 7% stake in Chinese aluminum giant Chalco. However, revenue was down slightly by about 3% from year ago levels, coming in at $7.4 billion. Most of the sequential revenue dropoff relates to a weaker dollar and lower spot prices for aluminum products. Earnings, meanwhile, were pressured by higher energy and raw materials prices.

But there was also some exciting news relating to making the company smaller - and for those of us who are avid followers of the company, that is welcome and promising news. Thanks to the monetization of the Chalco investment, steady cash flows, and non-performing asset sales, Alcoa's board has authorized the current stock buyback plan be increased from 10% to a full 25% of outstanding shares over the next three years.

So far, less than a quarter of the targeted amount has been repurchased, so investors can likely expect to see a steady wall of buying demand in upcoming quarters.

Cleaning House
Alcoa recorded $845 million in restructuring charges during the third quarter, mostly relating to the sale of some "downstream" business segments that were low-margin and perennial underperformers, including the packaging and consumer segment and the automotive castings segment.

These moves (which have been wished for by many analysts over the past two years, including myself) provide several benefits for current shareholders. First, it cleans up the balance sheet and focuses attention on the high margin core businesses of raw alumina production and engineered aluminum products. Secondly, it dresses up the company for a possible sale in the future, as most who doubted that Alcoa would be sold in the past year pointed to the downstream businesses as the unwanted stepchildren in the deal.

All Quiet on the Buyout Front
Most of the investors and hedge funds that picked up Alcoa in the late summer on heightened buyout rumors have since left; the stock is down over 15% in the past three months, versus a slight gain for the Dow. It was just about three months ago that Canadian-based Alcan (NYSE:AL) agreed to be bought out by Brazilian mining giant Rio Tinto (NYSE:RTP), whose friendly offer was a full $10 per share higher than Alcoa's hostile bid to reunite the one-time subsidiary.

Greener Than You Think
Alcoa can be an easy target for "green tech" proponents because it does create a lot of pollution, and it does take a lot of energy to get aluminum to its final form. But I caution investors to be overly swayed by those arguments - aluminum also provides many long-term energy benefits because of its low weight and the ease with which it can be recycled. In the long run, the energy saving benefits of the metal combined with its relative value compared to copper and zinc make it an attractive metal for many end-market uses.

International Story is Key
The geographical breakdown of Alcoa's revenue shows a pattern we have seen elsewhere in recent months; North American sales are flat to down, while Asia, Europe, Latin America and the Middle East are all growing. In fact, China alone is growing its consumption by a staggering 35% per year, amounting to nearly 15% of Alcoa's total revenue.

China is working hard to increase its domestic aluminum capacity, but still can't keep up with its own demand - China is still a net importer of the product. This, along with global aluminum demand growing an estimated 10% per year, should help to propel spot prices higher in the coming quarters. It should also keep Alcoa in the buyout-candidate arena - there simply aren't a lot of large, attractive aluminum assets to be had, and buying a world-class producer with large reserves would be a good diversification play for many international miners and metals producers.

Parting Thoughts
There has been a deflated feeling around AA stock ever since the Alcan deal fell through, but the company is actually making itself more attractive as a result of the restructuring efforts. The valuation is a very reasonable 15-times trailing earnings to go along with the modest 1.80% dividend yield. I think relative to other metals companies, Alcoa represents a solid core holding and a good play on global growth outside the U.S.

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