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Aluminum maker and Dow-30 component Alcoa (AAFree Alcoa Stock Report) has reported its second-quarter results. Sales, at $5.96 billion, essentially matched our $5.98 billion estimate, but marked a 9.4% drop from the year-earlier tally. Although aluminum prices are down year to year, market demand for the alloy is starting to improve and supply levels have been firming up. Much of the progress has been attributable to growing aluminum consumption in the aerospace and automotive sectors. Meantime, the company earned $0.06 a share in the June interim (excluding $0.06 in one-time charges), a steep decline from the $0.28 a share logged in the prior-year period but in-line with Wall Street's consensus of $0.05 a share. Alcoa stock was flat in late afternoon trading.

Despite the decent first-quarter performance, relatively speaking, many challenges remain for the global producer of alumina and rolled products. Near the top of that list is the elevated cost of energy, which no doubt causes some problems for manufacturing and shipping. Perhaps a more looming threat is aluminum production in China, which has created excess supplies and kept prices under pressure. To that end, the People's Republic declared earlier this year that it would reduce its projected 2012 aluminum output by more than 1.0 million tons, from a total annual capacity of 17.1 million tons. However, there have been uncorroborated reports that state-owned Chinese companies are maintaining production levels to protect jobs.

Looking ahead, our full-year top-line forecast stands at $24.3 billion, which would represent a 2%-3% decrease from the comparable 2011 figure. But we've trimmed our 2012 bottom-line estimate, from $0.60 a share to $0.55 a share, since sales are liable to slide at a faster rate than operating expenses. (Alcoa earned $0.67 a share in 2011.) In all likelihood, 2013 will be a nice bounce-back year for the Dow staple, with sales probably advancing 9.0%, to $26.5 billion, while share net may double to $1.10.

Over the 3- to 5-year investment horizon, Alcoa stock offers wide price recovery potential, though a measure of patience may be required. Indeed, the company's long-term prospects will largely hinge on aluminum demand from the auto manufacturing sector, since carmakers are under increasing pressure to build lighter, more fuel-efficient vehicles without skimping on passenger safety. Too, the commercial airline industry is in the middle of turning over its aging fleet, which is bound to drive demand for aluminum, owing to the alloy's high strength-to-weight ratio. Furthermore, the dividend on these neutrally ranked shares, although modest, sweetens the pot.

About The Company:Alcoa Inc., a Pennsylvania corporation, is a global leader in the production and management of primary aluminum, fabricated aluminum, and alumina combined. It supplies the aerospace, automotive, building and construction, commercial transportation, and industrial markets.  It has more than 300 operating and sales locations in over 30 countries. Sales of aluminum and alumina account for more than three-fourths of Alcoa’s total revenues. It also produces nonaluminum products, such as precision castings and fasteners for the aerospace and industrial markets. Alcoa’s operations consist of four worldwide reportable segments: Alumina, Primary Metals, Flat-Rolled Products, and Engineered Products and Solutions.

At the time of this writing, the author did not have positions in any of the companies mentioned.