The basic premise behind Alcoa’s split was to separate the fast-growing value-add business from the legacy commodity business. There definitely is merit in this argument since the markets (SPY) value the cyclical commodity business and engineering business differently. Market participants expected Arconic (ARNC) to command a premium over Alcoa (AA) once both companies were listed as separate entities.
Parallels were drawn with Warren Buffett’s (BRK-B) acquisition of Precision Castparts. We should note that companies in the engineering space generally trade at a higher valuation multiple than commodity companies (RIO).
It was supposed to be the crown jewel
When the split was announced last year, Arconic was supposed to be the crown jewel that would help drive value for shareholders once listed as a separate entity. The commodity business was expected to sag in what looked like a prolonged slowdown in metal prices. Notably, most metal prices were trading near their 2009 lows when Alcoa’s split was announced last year.
Arconic has come under pressure
After the listing, Alcoa saw an upward price action, while Arconic saw selling pressure. That’s not really surprising. We noted that in our previous series Why Investors Might Have to Be Patient with the Popst-Split Arconic.
Notably, in the last couple of quarters, Alcoa’s upstream performance was in line with estimates, but the Arconic segments were a drag on the consolidated company’s financial performance. To find out more, read Not Upstream, but Arconic Segments Hit Alcoa’s 3Q16 Earnings.
Market dynamics have changed since Alcoa announced the split. In the next part of this series, we’ll see how the split is impacting the two companies’ recent performances.