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Earnings Time for Arconic, Amid Controversy

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Part 3
Earnings Time for Arconic, Amid Controversy PART 3 OF 4

Can Arconic Improve Profit Margins in 1Q17?

Profit margins

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.

Can Arconic Improve Profit Margins in 1Q17?

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Arconic’s (ARNC) EBITDA margins have been a cause of concern for investors. Notably, Elliott Management also raised the issue.

1Q17 estimates

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.

Segment-wise breakdown

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.

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