Valuation multiples are a key metric that investors consider. With the help of relative valuations, we can assess a company’s valuation with respect to its peers’ valuations.
For companies in the industrial space, the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is the preferred valuation metric. The forward EV-to-EBITDA multiple tells us how a company is valued for each dollar of EBITDA.
Alcoa versus Precision Castparts
Historically, Alcoa (AA) has traded at a discount to companies like Precision Castparts (BRK-B). Alcoa’s Engineered Products and Solutions segment supplies aerospace components. It accounted for a little less than 45% of Alcoa’s downstream revenues in the most recent quarter. On the other hand, according to Precision Castparts, 70% of its sales come from the aerospace market. Companies in the aerospace component space generally trade at higher valuation multiples.
Although the Rolled Products segment isn’t exactly a money spinner, its exclusion from Arconic’s portfolio would help the company better position itself as a value-add player. The Rolled Products segment wouldn’t be part of Arconic. Instead, it would fall under Alcoa. We could see a positive impact on Arconic’s post-split valuation multiples.
Having said that, the valuation multiples of major aircraft manufacturers like Boeing (BA) and Airbus (EADSY) have fallen in the last couple of months as you can see in the above graph. However, we haven’t seen falling aerospace valuations on component producers. Component manufacturers like Woodward (WWD) and Barnes (B) haven’t seen a commensurate fall in their valuation multiples. It would be interesting to see how markets (SPY) value Arconic after the split amid concerns over the aerospace industry. Nonetheless, expecting Arconic to trade at the multiples at which Warren Buffett acquired Precision Castparts might turn out to be wishful thinking.
Meanwhile, would the inclusion of Rolled Products segment benefit Alcoa? We’ll explore this in the next part of the series.