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Are Short-Term Challenges Playing on Arconic Investors’ Minds?

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Short-term challenges

Previously, we saw that Alcoa (AA) looks in better shape than when the split was announced last year. Arconic (ARNC), though, has seen selling pressure. In this part of the series, we’ll look at the short-term concerns that seem to be playing on Arconic investors’ minds.

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Aerospace slowdown

Arconic houses the business segments that were under the Global Rolled Products (or GRP), Transportation and Construction Solutions (or TCS), and Engineered Products and Solutions (or EPS) businesses of the consolidated Alcoa. The EPS segment would be the key driver of Arconic’s earnings, given its share in the company’s earnings.

In 3Q16, the segment accounted for more than 60.0% of Alcoa’s downstream ATOI (after-tax operating income) with a revenue share of only about 40.0%. You can see the details of Alcoa’s downstream ATOI in the graph above.

Short-term problems for Arconic

There have been concerns over the aerospace component industry’s health (CSTM). During its 3Q16 earnings call, Alcoa cited inventory destocking, lower aircraft build rates, and model transitions as the near-term headwinds for its EPS segment. It tried to allay some of the fears related to the slowdown in aircraft build rates as a short-term headwind. The company expects the aerospace market (BA) (ITA) to grow in the mid-single digits in the medium to long term.

Meanwhile, the long-term outlook for Arconic looks decent, ,and the short-term issues seem to be weighing heavily. The company slashed its earnings guidance in the 3Q16 earnings call. We’ll look at that guidance in the next part.

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