Tickers in this Article: F, AA, RIO, BHP, ACH, BA, GE, AKS, WHR
As aluminum is an economically sensitive metal, it is probably no great surprise that Alcoa (NYSE:AA) stock has underperformed amidst growing worries that the U.S. will trip over into recession. On the other hand, there are a lot of secular positives for both aluminum and Alcoa, that argue in favor of the thought that this stock should work at some point. The question, then, is whether patience can really pay large enough dividends to make Alcoa worth the time and trouble.

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A Fixed Third Quarter
Alcoa missed the earnings estimate for the quarter and that's certainly disappointing. It also isn't quite as bad as it may seem. Revenue rose about 21% from last year, but declined about 3% from the prior quarter. Performance was fairly consistent across the company's operating segments, but Alcoa did see a slowdown in demand from automakers and heavy truck manufacturers. On the profit side, ATOI (after-tax operating income) rose 41% from last year, but dropped 27% on a sequential basis.

Looking at this performance, investors would do well to remember that aluminum prices, as quoted on the London Metal Exchange, have fallen 20% since May and about 12% on a year-to-date basis. All things considered, then, Alcoa's results are not exactly disastrous, or at least not an indictment of management.

Okay, Now What?
In the short run there is no getting around the fact that aluminum, like copper, is an economically sensitive commodity. If people are not buying cars or appliances, and if companies are not buying aircraft, truck trailers, or turbines, then aluminum is not going to do all that well. After all, baseline demand in products like food packaging isn't growing that fast.

Longer term, there are some reasons for a little more optimism. Aluminum's performance characteristics of high strength to weight ratio, resistance to corrosion, etc., are well known and companies like Boeing (NYSE:BA) and Ford (NYSE:F) are still migrating towards using more and more of it; the same is true for appliance makers like Whirlpool (NYSE:WHR) and General Electric (NYSE:GE). There is a reasonable chance, then, that Alcoa can pick up incremental business from the likes of Steel Dynamics (Nasdaq:STLD) and AK Steel (NYSE:AKS) as this transition progresses.

Alcoa also has some company-specific improvements to consider. Namely, Alcoa is in good shape regarding its bauxite costs, an important cost factor that can help it compete with Chinese producers like Chalco (NYSE:ACH). Moreover, the company is moving the right way down the cost curve and a new plant in Saudi Arabia will be one of the most cost-efficient plants in the world, when it opens. In a world that doesn't care if its aluminum comes from Alcoa, Chalco, Rio Tinto (NYSE:RIO), or BHP Billiton (NYSE:BHP), those cost considerations matter.

The Bottom Line
There are precious few pure-play metal companies left in the world, as companies like Vale (Nasdaq:VALE) and Freeport McMoRan (NYSE:FCX) have pursued diversification strategies. As a result, investors should not sleep on the prospects that Alcoa will draw a bid someday. If aluminum is pushed into another cyclical swoon on economic troubles in North America and Europe, that "someday" might not be so far away.

Alcoa looks too cheap based on its inherent qualities, but that has been true before and done the stock, and the stockholders, no good. If the economy strengthens, Alcoa's stock should do better, but investors need to realize that buying Alcoa as a value stock is, at best, a long-term engagement. (For additional reading, take a look at Investing In The Metals Markets.)

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