Alcoa (NYSE:AA) is looking like a pretty good example of a company that is doing a lot of the right things internally, but can't make much objective progress in the face of significant industry and economic headwinds. Alcoa seems better positioned than Noranda (NYSE:NOR), Century Aluminum (Nasdaq:CENX) or Rio Tinto (NYSE:RIO), and the stock is trading below historical forward multiples, but it seems hard to imagine the stock really moving until aluminum prices improve.

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Q3 Was Another Tough Quarter
Alcoa's reported financial results for the third quarter admittedly don't look all that great on an objective basis. That said, the company did exceed volume expectations and the company's margins were solid relative to expectations.

Revenue dropped about 9% this quarter, with double-digit declines in alumina and primary aluminum dragging down results. Prices were a major headwind, as the company's realizations dropped nearly 17% from the year-ago level. Revenue was barely down in engineered products (down 0.4%), as strong aerospace demand from companies like Boeing (NYSE:BA) has helped the business.

Gross margin dropped about eight points, and the company's operating income reversed into a loss. Looking at the non-GAAP after-tax operating income (ATOI), though, there was a very definite dichotomy in results. Alumina and primary aluminum both saw significant reversals into the red, while rolled aluminum and engineered products both saw double-digit growth and profits. While the upstream businesses (alumina and primary) combined for a $23 million ATOI loss, rolled and engineered aluminum products posted $278 million in positive ATOI.

SEE: Understanding The Income Statement

Is Hitting Efficiency Goals Early a Mixed Blessing?
Here's a little window into the sometimes-twisted way Wall Street works. It's clear that Alcoa's downstream operations have held up pretty well (better than expected, at least). In fact, it looks like management has already more or less achieved many of its 2015 goals when it comes to these operations. So now, there are some analysts arguing that this is a bad thing, as it eliminates something for investors to look forward to - never mind the possibility that management could do better still.

Aerospace Can Carry the Load for Now, but Demand Is a Concern
As Boeing and Airbus increase production for this latest bull cycle in commercial aerospace, demand for aluminum in the aerospace industry has been quite strong. Likewise, demand in the auto industry seems OK, as domestic demand seems to be offsetting some weakness in Europe and elsewhere.

That said, Alcoa management did shave 1% off its global aluminum demand growth estimate for 2012 (from 7% to 6%). As Cummins' (NYSE:CMI) warning on Tuesday would support, global truck/trailer demand has definitely weakened, particularly in Europe and China. Making matters worse, it looks like the malaise in China is really starting to impact consumer segments, as management sees slower growth in the Chinese beverage can industry as well (something to consider for investors in Ball (NYSE:BLL), Crown Holdings (NYSE:CCK) and Rexam (OTC:REXMY)).

SEE: How The U.S. Automobile Industry Has Changed

The Bottom Line
Alcoa has an edge on its aluminum rivals due in large part to its stronger downstream businesses (which help insulate the company from spot aluminum/alumina prices). Even still, the company probably needs aluminum prices above $1 or $1.10/lb for the stock to get moving (and LME spot prices are at about 93 cents/lb. today).

With that in mind, then, the stock may be a value today but not necessarily an especially good buy in the short term. Using a 6.5 times multiple on 2013 EBTIDA suggests a price target of about $12.75, while a 7.5 times multiple (the company's historical average forward multiple) drives a target north of $15.50. Either target looks worthwhile against a current price near $9 per share, but 2013 EBITDA estimates have fallen about 3% in the past three months and there could be further risks to short-term numbers if Europe and/or China slow further.

At the time of writing, Stephen D. Simpson did not own any shares in the companies mentioned.

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