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As usual, earnings season in the U.S. kicked off with reporting from Alcoa, the manufacturer of lightweight metal products. The company reported after the bell on January 11th, and the earnings of $0.04 a share came in as double analyst estimates of $0.02 a share. It is notable that just one year ago analysts were forecasting fourth quarter earnings to be $0.29 a share, but the continued rout in aluminum and other commodities has seen profits dwindling at Alcoa.

The company has been fighting back by cutting aluminum production, and the shuttering of plants in the U.S. this year has caused U.S. aluminum production to drop to a 65 year low. Even so, investors sold shares after yesterday’s earnings results, with Alcoa shares falling to $7.94 in after-hours trading.

The past year has also seen the share price of the aluminum, nickel, titanium and lightweight allow producer tumbling, but we wonder if the sell-off has been overdone and there is good value in Alcoa shares now. Shares are very close to the 2013 low as well as the 2009 low. Prior to 2009 we have to go back to 1990 to find price below $8 a share. Below we take a closer look at the business to help decide if now is a good time to start buying back into Alcoa.

Splitting Alcoa in Two

One looming event in the Alcoa business is the announced split of the company. One half will comprise the less profitable aluminum commodity and smelting operations and will keep the Alcoa name. The other will be made up of the Engineered Products and Solutions (EPS), Global Rolled Products (GRP) and Transportation and Construction Solutions (TCS) units with the name yet to be determined. The split is expected to be completed in mid-2016.

As of 2014 reporting, the new Alcoa had annual revenues of $13.2 billion, while the yet to be named company had yearly revenues of $14.5 billion. The new Alcoa is expected to improve profitability as the company continues to shutter mining, smelting and refining operations, as well as focusing more on recycling. The second company is comprised of the value added side of the business, which has seen a much greater emphasis since 2010 as Alcoa shifted strategy to move away from the raw commodity business.

Following the announcement of the split in the company on September 28, 2015 shares of Alcoa rocketed 20% higher. They have been unable to hold on to the gains though amidst the disappointing third quarter earnings results, a slowdown in the Chinese economy, and the global rout in aluminum and other commodity prices.

Plummeting Aluminum Prices

As the third largest producer of aluminum in the world the fortunes of Alcoa are necessarily tied to the price of aluminum. This has been a definite drag on the company over the past 7 years as aluminum price dropped from over $3,000 a ton in March 2008 to the recent price of just under $1,500 a ton.

The drag on aluminum prices has come due to oversupply as Chinese miners and smelters have dramatically increased capacity in recent years to keep up with Chinese demand.

While Chinese demand is now slumping, overall the demand for aluminum actually increased by 6.5% in 2015, even as prices headed lower. Alcoa maintains that global demand for aluminum will double between 2010 and 2020, which should help support price. Unfortunately Chinese production is expected to continue to climb, though Alcoa has also projected that 2016 will see a supply deficit as producers around the world curtail production.

A Silver Lining for Aluminum Producer Alcoa

All is not negative for Alcoa. While it is the third largest aluminum producer in the world, since 2010 the company has been shifting its focus from base commodity production to value added products. This has put an emphasis on titanium and alloys for aerospace and automotive industries, while the company sells or closes mining and smelting operations.

The remaining aluminum capacity and production has gone to flat rolled aluminum, which still commands a premium price. Alcoa has also been developing advanced 3D printing capabilities meant to replace traditional forging and casting.

Additionally, the company split will separate the value added business units from the raw commodity units, and should positively impact on earnings for both units. Current shareholders will receive stock in both companies, though pricing is uncertain at this point.

What Will the Future Hold for Alcoa?

While some have pointed to the split up of Alcoa and said the company is simply trying to jettison the raw commodity business, I think this is a short sighted analysis. Global demand for aluminum continues to climb and while the supply glut is currently depressing prices, that will turn around at some point in the future. It may seem easy to think prices will remain low, but the truth is we will likely see a rebound within the next 12-18 months as global production is curtailed and supply returns to more normal levels.

The new value added business that will focus on aerospace, automotive, and 3D printing will almost certainly see its share price increasing immediately following the split. The raw commodity portion of the business that will keep the Alcoa name is more of a mystery at this point though. If aluminum price remains depressed when the company splits there could be a large sell-off in the shares immediately following the split.

If Alcoa has timed the split properly and aluminum price is back on the rise when the split is made however we could see strong gains for both sides. The split is not projected to occur until the second half of 2016 and it is imaginable that aluminum could be on the mend by that time.

Buy, Sell, or Hold Alcoa?

So we finally come to the big question…should you be buying Alcoa in 2016, selling Alcoa in 2016, or simply holding or sitting on the sidelines?

Personally I think Alcoa under $8 a share represents great value. Sure we may see price decline some from here, but I think the stock is near a floor. Additionally I firmly believe that the recovery in aluminum price, which will come in 2016, will send shares of Alcoa sharply higher. A move back above $1,800 a ton in aluminum could potentially double the share price for Alcoa and make it one of the best performing stocks of 2016.

And what do the experts say? They are not quite as bullish as I am, but they are decidedly bullish. Alcoa is covered by 17 analysts and of those only 1 is calling the stock a sell. A further 7 are saying to hold the stock, and 8 analysts or nearly half are calling the stock a buy. The average price target from the professional analysts is more conservative than mine, with an average target of $11.21 a share from analysts. Still, this is a 40% increase from the current stock price, which would be a very nice return.

Ultimately you need to make your own decision, but I think I’ve shown that putting the price of aluminum aside, Alcoa is being run very well. Aluminum price will recover in time, and when that happens shares of Alcoa are primed to rocket higher.