Morningstar Metals Analyst: $19 Fair Value For Alcoa's stock, 'A Lot Of Upside Potential From Here'

Alcoa Inc AA reported its second-quarter earnings on Wednesday post the market closing. Analysts were expecting the company to report adjusted EPS of $0.23, while the company reported adjusted EPS of $0.19.

Andrew Lane, metals analyst at Morningstar, was on CNBC Thursday to discuss why investors shouldn't worry about Alcoa's second-quarter earnings and discuss his outlook for the stock.

Rough Quarter

"I am optimistic about the company's long-term prospects," Lane began. "But the second-quarter here was really a very transitional quarter for the company. Of course Alcoa is undergoing a very well publicized portfolio transformation closing down high-cost commodity exposure, high-cost smelting capacity, while at the same time investing downstream in the specialty metal space. So, in this quarter Aluminum prices didn't really cooperate."

He continued, "The [bottom] sort of fell out for the primary metals, the smelting segment and the recent acquisitions in the downstream segment hadn't really yet kicked in to provide benefits. So, it was a rough quarter for Alcoa, but even so, I think, investors have been a little bit short-sighted [and our pricing in] the true potential of a long-term recovery based on that portfolio transformation for the company."

$19: Fair Value For Stock, Lots Of Upside Potential

Lane was asked if according to him $19 is the fair value for Alcoa's stock. He replied, "Yeah, that's correct. That is our current fair value estimates. So, shares are obviously trading well below our fair value at the time being. But at Morningstar, we take a very long-term market view. So, we think, current market prices allow for a very attractive entry point for investors who are interested in this long-term transformational story that Alcoa is undergoing."

"We think, current share price is just above $10 a share are in-line with our low case or our bear case estimates and we see a lot of upside potential from here."