Morningstar | Arconic Reports Mixed 2Q Results; Announces Intent to Sell BCS Business Amid Portfolio Review. See Updated Analyst Note from 31 Jul 2018
Arconic reported mixed second-quarter results. Impressive profit growth from the transportation and construction solutions segment offset lower profits for both the engineered products and solutions and global rolled products segments versus the prior-year period. With our forecasts largely unchanged, our fair value estimate of $23 per share remains intact. We also maintain our no-moat rating.Management reiterated its full-year guidance to sales of $13.7 billion-$14.0 billion, earnings of $1.17-$1.27 per share, and at least $250 million of free cash flow. We expect the company to achieve all three, but we don't expect a restoration of 2017 adjusted operating margins until 2020, at the earliest, as turnaround efforts continue.
In Arconic's earnings release, management provided some detail on an all-encompassing review of the company's broad product line portfolio. Due to the review process, management has decided to sell the building and construction systems business. This is noteworthy, as it generates roughly $1 billion of annual sales (versus a companywide figure just shy of $13 billion in 2017). Additionally, it had housed the since-discontinued Reynobond PE cladding product that had been used in the Grenfell Tower, which burned down in June 2017. Absent concrete details about the timing and potential deal price, we continue to include the BCS business in our valuation model. We suspect the firm will pursue additional asset sales as a result of the portfolio review.
The company's earnings release comes amid great speculation that the company is considering takeover offers from a variety of private equity firms, as reported by the Wall Street Journal. Reportedly, potential deal prices in the "mid-$20s" per share have been proposed. This possibility was not discussed during the company's earnings call. Having reiterated our $23 per share fair value estimate, we'd view a deal price any higher as a value-destructive proposition for a potential buyer.
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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