Can Arconic Improve Profit Margins in 1Q17?
There are several metrics you can use to measure an enterprise’s profit margins. Net profit margin is widely used to measure a company’s profitability. For companies in the industrials space (ATI) (XLI) like Woodward (WWD), and Constellium (CSTM), the EBITDA (earnings before interest, tax, depreciation, and amortization) margin is generally used.
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Arconic’s (ARNC) EBITDA margins have been a cause of concern for investors. Notably, Elliott Management also raised the issue.
According to the consensus estimates compiled by Thomson Reuters, analysts expect Arconic to post adjusted EBITDA of $430 million in 1Q17, which would imply a margin of 14.4%. The company had posted an adjusted EBITDA of $360 million in 4Q16, with a margin of 12.2%.
We should remember that the 4Q16 EBITDA excludes the impact of separation costs. Arconic has given EBITDA guidance of $420 million-$450 million for 1Q17. The guidance excludes the impact of separation expenses of ~$20 million.
Alcoa’s EPS (Engineered Products and Solutions) segment generated an adjusted EBITDA margin of 18.8% in 4Q16, which was an improvement of 1.5% over the corresponding quarter in 2015. The Global Rolled Products (or GRP) segment reported an adjusted EBITDA margin of 10.8% in 4Q16—up 1.0% from 4Q15.
Arconic expects a slight improvement in EBITDA margins across its three business segments this year. It also expects a further increase in its EBITDA margins over the next three-year to five-year period.
In the next and final part of this series, we’ll discuss what analysts are recommending for Arconic prior to its 1Q17 earnings release.