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Patience Is Still Needed At Alcoa

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Alcoa (AA) has frustrated investors recently, but it looks as if things are about to change. The company posted revenue of $5.85 billion, enough to beat Street estimates of $5.82 billion.

Remarkably, though, the beat arrived even as sales slipped roughly 2%. Again, I've pointed out in the past that betting on this company requires just as much faith in Alcoa's management as there might be on the prospect of industry recovering. That Alcoa was able exceed sales targets even though Aluminum prices dropped 8% sequentially is no small accomplishment.

This is yet another example of why it's time for investors to separate the aluminum industry's overall struggles from Alcoa's real underlying value, even though the company reported a deeper quarter loss of 11 cents per share. Excluding one-time items, though, the company earned 7 cents per share, which was enough to beat Street estimates by a penny.

I expect that many will grapple about the widening loss. But it's worth noting here that the higher loss was included $42 million in charges tied to the closure of facilities. I talked recently about assessing Alcoa based on its after-tax operating income (ATOI) performance.

While I won't disagree that Alcoa's growth has suffered, but management has outperformed its business based on ATOI performance, including in the company's Engineering Products and Solutions business, which posted ATOI of $193 million, up 23% year over year and 12% sequentially.

Likewise, the ATOI in the Alumina business advanced to $64 million, up from $58 million in the first quarter, while representing a year-over-year increase of 178%. Management figured out ways to extract value as adjusted EBITDA per metric ton was $47 up from $44 in first quarter 2013 and up from $31 in second quarter 2012.

What this means is that there are still plenty of unrealized value in this company. Looking ahead, Alcoa expects to see aluminum consumption to increase by 7% in 2013. The company predicts slow growth for the aerospace sector this year, but an increase in the growth of the automotive sector, where (among others)  Ford (F) have considered using aluminum in their fleet of trucks. And despite the weak aerospace outlook, Boeing (BA) is still in talks to utilize aluminum for their jets.

In the meantime, patience is still the best play here. I think when compared to the company's historical valuation norms, these shares look cheap. What's more, I much rather risk getting trapped in a value play like Alcoa that pays a decent yield than miss out on the value itself. And to that end, Alcoa seems poised to reward investors for their patience. And I think the company's efforts in China may be a major catalyst of that growth.

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Stock Tickers: AA BA Author Disclosure: At the time of publication Richard did not hold any stock in the companies mentioned.