EUR 850.00 For Business Accounts Only

Morningstar | Arconic Announces Major Restructuring Plans Along With Middling 4Q Results; Lowering FVE To $22

Although we expect Arconic to drive slow but steady profit growth in the coming years, we saw little progress in the fourth quarter. Ultimately, the company's fourth-quarter financial results will be overlooked due to the company's newly announced restructuring plan. Management indicated that Arconic will be split into two separate businesses called Engineered Products and Forgings and Global-Rolled Products. One of these businesses will ultimately be spun off from the parent and Arconic will pursue the sale of any remaining operations that do not fit into these new entities. Asset sales will likely be focused on the various businesses with the transportation and construction solutions segment, although other assets will be on the table as well.

We expect assets that fall under the engineered products and forgings category to generate the lion's share of incremental profits in the coming years. We suspect this spin-off plan aims to achieve a revaluation of that business by separating it from the undifferentiated, lower-growth rolling operations. Additionally, the plan likely aims to protect both companies from concerns about potential liabilities from the Grenfell Tower fire. Although our base case assumes no liabilities will emerge, concerns on this front have represented a major overhang for shares. Regardless, we don't expect the split to drive a material fundamental improvement to the new company's prospects. Dis-synergies are likely, although the magnitude will depend on a variety of factors yet to be determined. Therefore, the announced restructuring plan, in isolation, has no impact on our fair value estimate yet.

However, we are lowering our fair value estimate to $22 per share from $24 after reducing our near-term profit outlook. Our no-moat rating remains unchanged. Although we anticipate that the company will drive slow but steady profit growth over our five-year explicit forecast period, no significant catalysts are imminent.