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How Do Arconic’s Comps Valuation Look before Alcoa’s Split?

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Arconic’s comps valuation

Previously in this series, we’ve looked at Alcoa’s (AA) current valuation multiples and compared them with some of the other mining companies. In this article, we’ll compare Alcoa’s valuation multiples with some of the comps in the engineering space.

The comps that Alcoa highlighted for its value-added business currently trade at an average of 9.5x their forward EV-to-EBITDA.[1. enterprise value to earnings before interest, tax, depreciation, and amortization] In contrast, Alcoa is currently trading only ~7.7x its next four quarters’ expected EBITDA.

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Among the comps, TransDigm Group (TDG) is trading at the highest multiple of ~15.7x while Constellium (CSTM) is trading at the lowest multiple of ~5.7x its next four quarters’ expected EBITDA. However, CSTM is grappling with a huge debt burden coupled with poor profitability, which explains its depressed valuations.

Precision Castparts

Alcoa sees Precision Castparts (PCP) as a close proxy for its Aerospace Component business (ITA). Market participants who are bullish on Alcoa (AA) point to Berkshire Hathaway’s (BRK-B) acquisition of Precision Castparts. Berkshire acquired Precision Castparts at a trailing 12-month EV-to-EBITDA of 13x.

In light of the PCP acquisition, some analysts believe that Arconic could be worth more than the combined entity. However, Alcoa has historically traded below PCP’s valuation multiples. You can read Alcoa Isn’t Precision Castparts, and the Market Knows That! to explore the key differences between Alcoa and PCP.

Nonetheless, Arconic could see a valuation rerating after it is listed as a separate company later this year. In our view, there is some scope for valuation multiple expansion for Alcoa. This could support Alcoa’s price action in the short to medium term.

Meanwhile, along with the valuation multiples, you should also look at the earnings estimates. In the next part of this series, we’ll see what are analysts projecting for Alcoa’s forward earnings.

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