Do Arconic’s Short-Term Challenges Outweigh Long-Term Drivers?



Arconic’s short-term challenges

During its 3Q16 earnings call, Alcoa lowered the Engineered Products and Solutions (or EPS) segment’s fiscal 2016 revenue guidance to $5.6 billion–$5.8 billion from the previous guidance of $5.9 billion–$6.1 billion.

The company also slightly lowered its EBITDA (earnings before interest, tax, depreciation, and amortization) margin guidance to 21.0% from 21.0%–22.0%. It’s worth noting that Alcoa also lowered the EPS segment’s revenue goal and EBITDA margin goal during its 1Q16 earnings call.

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Business targets lowered

In the Transportation and Construction Solutions (or TCS) segment, Alcoa lowered its fiscal 2016 revenue goal to $1.7 billion–$1.8 billion from the previous goal of $2.1 billion. However, the company maintained its goal of a 15.0% EBITDA margin for the segment.

The revenue target for the Global Rolled Products (or GRP) segment was also revised downward. The GRP segment supplies auto sheet products. Constellium (CSTM) and Advance Auto Parts (AAP) also supply automotive companies (F).

Arconic faces several short-term headwinds, as we’ve already seen. However, the company has several growth drivers that could pay off in the long run.

Long-term drivers

The expected synergy from Alcoa’s acquisition of Firth Rixson could be a key driver of Arconic’s (ARNC) medium-term performance. Growth drivers such as Alcoa’s Micromill technology could also pay off in the long term.

Arconic’s higher leverage ratio is another investor concern. Among the deleveraging possibilities for Arconic, the company has retained a 19.9% stake in Alcoa (AA), which 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 in order to reap the long-term benefits.

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