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In Focus: What Challenges Would Arconic Face in the Short Term?

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Challenges

Previously in this series, we’ve looked at the challenges and opportunities that Alcoa (AA) would face after its split. Now, we’ll look at the various challenges that Arconic could face in the short term. Let’s begin by looking at Arconic’s post-split structure.

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Post-split structure

Arconic’s post-split structure would include the business segments that are currently under the Global Rolled Products (or GRP), Transportation and Construction Solutions (or TCS), and Engineered Products and Solutions (or EPS) businesses. The GRP segment caters to the fast-growing auto sheet market. Alcoa currently is a leading supplier in this space.

The TCS segment will mainly supply the nonresidential construction and commercial transportation industries. Alcoa is the market leader in commercial architectural systems in the North American market. It’s also a leading producer of commercial vehicle wheels.

Aerospace play

The EPS segment will be Arconic’s prized asset. This segment will compete with companies such as Precision Castparts (BRK-B), Constellium (CSTM), and Woodward (WWD) to capture the demand from the aerospace sector (ITA). The EPS segment will supply high-precision components to the aerospace market. Alcoa has grown its aerospace portfolio over the last year and has made several acquisitions in this space.

The EPS segment would be the key driver of Arconic’s earnings after the split. In 2Q16, the segment accounted for more than 61% of Alcoa’s downstream ATOI (after-tax operating income). You can see the details of Alcoa’s downstream ATOI in the graph above.

Meanwhile, the near-term outlook for the EPS segment does not look very optimistic. There are signs of a slowdown in the aerospace demand, which is EPS segment’s key end market. We’ll discuss Arconic’s near-term challenges in the next article.

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