Morningstar | Arconic Issues Solid 1Q Earnings Results and Provides More Detail on Planned Separation
Arconic shares traded higher after the company reported impressive 15% year-on-year adjusted operating income growth in the first quarter. With the encouraging start to the year, management raised its 2019 guidance for both adjusted earnings and adjusted free cash flow. Although we expected healthy profit growth over the next few years, our forecasts reflected little progress in 2019 and a larger jump in 2020. We now spread the increase more smoothly across the two years, but our long-term outlook is unchanged. Having updated our valuation model, our $22 per share fair value estimate and no-moat rating remain intact.We continue to view the engineered products and solutions, or EPS, segment as the most significant driver of incremental profits. We forecast a 7.5% CAGR for operating income over our five-year explicit forecast period versus 4% and negative 3% for the transportation and construction solutions, or TCS, segment and the global rolled products, or GRP, business, respectively. Although the EPS segment's execution has been lacking in recent quarters, we still anticipate that the rising tide of commercial aircraft demand will boost profitability. Accordingly, we forecast that the segment’s operating margins will expand to 20% by 2020 from only 14% in 2018 before settling at a 17% midcycle level. We forecast relatively flat margins for the lower-growth GRP and TCS segments.
During the earnings call, management also provided an update on Arconic's planned separation into two distinct companies. One will house the engineered products and forgings operations, while the other will house the global rolled products business. Although management had previously indicated that it intended to sell most of the TCS assets, it now plans to shift the TCS forged aluminum wheels business into the former and the aluminum extrusions and building and constructions systems businesses into the latter. The separation is slated for completion in the second quarter of 2020.
Arconic is engaged in lightweight metals engineering and manufacturing. The company's segments include: Engineered Products and Solutions, which produces products that are used mainly in the aerospace (commercial and defense), industrial, commercial transportation, and power generation end markets; Global Rolled Products, which produces aluminum sheet and plate for a variety of end markets, and also produces aseptic foil for the packaging end market; and Transportation and Construction Solutions, which produces products that are used in the commercial transportation and nonresidential building and construction end markets, and also produces aluminum products for the industrial products end market.
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