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Buy Beaten-up Alcoa Inc (AA)?

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Alcoa Inc (NYSE:AA), the largest producer of aluminum in the U.S., was once a bellwether with a $40 billion market capitalization whose quarterly performance gave us a real sense of economic conditions at home and abroad.

Today, however, the company’s market cap has plummeted to $8.5 billion, and its chief function as an economic gauge relates to its traditional role as the first component of the Dow Jones Industrial Average to tell us about its quarter. Following the market close on Monday it again performed that function, providing some optimism about what may be in the offing for others that will report behind it.

Alcoa Inc (NYSE:AA)

The numbers
Alcoa Inc (NYSE:AA) recorded a quarterly loss of $119 million, or $0.11 a share. However, excluding items, the company earned $0.07 per share, a penny higher than the consensus expectation among the analysts who follow it. Total revenue was $5.85 billion, down slightly from the $5.96 billion for the second quarter of 2012.

A portion of the one-time items — $62 million — involved reserves related to Department of Justice and Securities and Exchange Commission investigations into alleged corrupt payments in the sale of alumina in Bahrain. Management noted that a settlement of the Justice Department’s charges could cost another $200 million. Beyond that, in an attempt reduce its costs, Alcoa Inc (NYSE:AA) took charges associated with shuttering a smelter in Italy and closing a pair of lines in Quebec.

As to the company’s segments, far and away the pack horse for the company was its engineered products and solutions business. The unit turned in $193 million in operating earnings, up 23% from the second quarter of 2012.

High demand, but higher supply
Management continues to anticipate solid 7% growth in overall global demand for its products for 2013. Specifically, the aerospace market is expected to require 9%-10% more aluminum, while automotive demand will likely be up by 1%-4%, commercial transportation by 3%-8%, packaging by 1%-2% building and construction by 4%-5%, and industrial gas turbine manufacturing by 3%-5%.

Despite this relatively rosy demand scenario, Alcoa Inc (NYSE:AA)’s average prices realization slid by 4% year over year. The culprit: increased worldwide production, including a doubling of output from China during about the past half-dozen years.

Alcoa Inc (NYSE:AA) has wrapped up — or is completing — expansions of facilities in the U.K., outside Pittsburgh, and in Indiana. In addition, it has announced planned three-year expenditures of about $275 million to expand and upgrade capacity at its Alcoa Inc (NYSE:AA), Tenn., rolling mill. That project relates to demand from increased automotive production.

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