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Morningstar | Arconic Planning 2020 Separation Into Two Companies; We See Limited Profit Growth Ahead

Arconic manufactures aluminum and specialty metals products for a wide variety of industrial end markets. Having split from Alcoa in November 2016, Arconic’s key end markets include aerospace and defense, building and construction, and automotive.Arconic operates via three reporting segments. Based on our forecasts, the engineered products and solutions, or EPS, segment will be the key driver of profitable growth for Arconic over our five-year explicit forecast period. Commercial aerospace serves as the key end market for this segment, with management having increased the company’s aerospace exposure via roughly $4.6 billion of acquisitions in 2014 and 2015. The EPS segment manufactures a variety of specialty metals and alloys, and aluminum is no longer its primary material by production volume.Although the key product lines of the global rolled products, or GRP, segment were historically aluminum plate, sheet, and foil, its most attractive growth market is now automotive. As witnessed by Ford’s changeover to an aluminum body for the 2015 F-150, aluminum is likely to continue to gradually take share from steel in automotive applications. We see this as a secular, rather than cyclical, growth driver, as aluminization will be driven by the need for lighter materials due to increasingly stringent fuel-efficiency standards.The transportation and construction solutions, or TCS, segment primarily manufactures aluminum products for the building and construction end market as well as the commercial transportation end market. We expect this segment to deliver higher profits thanks to rising U.S. nonresidential construction activity.In a midcycle environment, we expect the EPS segment to account for roughly 65% of companywide operating income, with the balance split roughly equally between the GRP and TCS segments.Arconic is targeting the second quarter of 2020 for another separation into two companies, this time dividing the engineering products and forgings business from the global rolled products business. The TCS operations will be split between these two companies.