Arconic’s business segments
Alcoa’s (AA) GRP (Global Rolled Products) segment broke a record in automotive sheet shipments in 2Q16, and these higher shipments were led by the ramp up of Alcoa’s Tennessee facility. Meanwhile, auto sheet demand has been led by automakers’ gradual shift to aluminum. Ford (F) is among the companies that have increased aluminum content in vehicles.
The GRP segment
However, as expected, weakness in the packaging market negatively impacted the GRP segment’s 2Q16 performance. The GRP segment’s 2Q16 ATOI (after-tax operating income) was similar to 1Q16. However, the EBITDA (earnings before interest, tax, depreciation, and amortization) fell to $326 per metric ton.
The per-ton EBITDA also includes the charges from Warrick plant, where Alcoa had to source alternate raw material supply due to the closure of its smelter. Nonetheless, even after accounting for this charge, the segment’s per-ton EBITDA fell by $10 in 2Q16 over 1Q16. The performance fell on a year-over-year basis as well, as you can see in the graph above.
The TCS segment
However, the Transportation & Construction Solution segment’s performance improved in 2Q16 over the previous quarter. The segment’s ATOI increased from $39 million to $46 million, with its EBITDA margin rising from 14.9% to 16.3%. Notably, this is a record EBITDA margin for the company’s TCS segment.
Keep in mind, you can consider ETFs like the Materials Select Sector SPDR ETF (XLB) for diversified exposure to the materials sector. Together, Alcoa and Ball Corporation (BLL) make up ~5.1% of XLB’s portfolio.
But it’s important to note that one of the key drivers of Alcoa’s lower valuation multiple compared to that of Precision Castparts (BRK-B) has been its low EBITDA margins. We’ll discuss this further in the next part.