Morningstar | Arconic Shares Spike Higher on Takeover Speculation but Remain Undervalued Versus Our $23 FVE
Arconic shares traded sharply higher on July 16 after a Wall Street Journal article reported that the company has drawn takeover interest from private equity firms. Shares have taken a beating this year due to disappointing fourth- and first-quarter earnings results, as well as management's guidance that margin expansion for the once-heralded engineered products and solutions segment is not imminent. Although the company's turnaround story will likely take years rather than quarters, it's not surprising that the company's depressed valuation would make it a more attractive buyout target for private equity firms. Pending the emergence of more concrete information regarding the likelihood of a takeover, our fair value estimate is unchanged at $23 per share. This sits 20% above the current share price of $19.20 at the July 16 close. Our no-moat rating also remains intact.Our $23 per share fair value estimate implies an enterprise value of 10 times trailing LTM adjusted EBITDA of $1.972 billion after adjusting for the company's pension and environmental remediation liabilities. In looking at PitchBook data for M&A transactions across comparable companies in recent years, this multiple appears to be a reasonable baseline. It would fall roughly in line with the current 10.2 times multiple associated with aluminum-centric peer Kaiser Aluminum.
Specialty metals manufacturers Carpenter Technology and Allegheny Technologies (both covered by Morningstar) also serve as relevant comps to Arconic a lthough they are not aluminum plays . All three companies offer a combination of exposure to the commercial aerospace supply chain while operating less differentiated milling operations. Currently, Carpenter trades at a 9.0 times multiple and Allegheny trades at 9.5 times, both above Arconic's current 7.5 times trading multiple.
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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