Previously in this series, we’ve looked at the various challenges that Arconic could face after its split from Alcoa (AA). In this article, we’ll see how Arconic can offer long-term value once it is listed as a separate company.
The comps that Alcoa (AA) highlighted for its Value-Added business currently trade at an average of 9.3x their forward EV-to-EBITDA.[1. enterprise value to earnings before interest, tax, depreciation, and amortization] In contrast, Alcoa (AA) is currently trading only ~7.8x its next four quarters’ expected EBITDA.
Among the comps, TransDigm Group (TDG) is trading at the highest multiple of ~15.6x. Constellium (CSTM) is trading at the lowest multiple of ~6x its next four quarters’ expected EBITDA. Alcoa sees Precision Castparts (PCP) as a close proxy for its Aerospace Component business (ITA).
Market participants that are bullish on Alcoa point to Berkshire Hathaway’s (BRK-B) acquisition of Precision Castparts. Berkshire Hathaway acquired Precision Castparts at a trailing 12-month EV-to-EBITDA of 13x.
The variation in valuation multiples in the comp set could be attributable to several factors such as end market exposure, profit margins, and leverage ratios. Despite these differences, Arconic could see a valuation rerating in the medium to long term.
The expected synergies from Firth Rixson could be the key drivers of Alcoa’s medium-term performance. Also, growth drivers such as Alcoa’s Micromill technology could pay off in the long term.
Among the deleveraging possibilities for Arconic, the company would retain a 19.9% stake in Alcoa that could be monetized to reduce Arconic’s debt.
However, in the short term, there might not be many growth drivers for Arconic. Investors may need to be patient with Arconic to reap the long-term benefits.
You can read What Investors Should Know about Alcoa’s Upcoming Split to see how the split could help create shareholder value.
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