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New Alcoa's Future Proving as Tough to Predict as Old Alcoa

Oct. 12, 2016
Investors who had cheered the separation punished the stock on Tuesday. 

Klaus Kleinfeld’s next job just got harder.

Kleinfeld, currently the chief executive officer of Alcoa Inc., will head up the jet- and car-parts business that’s being separated from the legacy metal-producing operations on Nov. 1.

Three weeks before that happens, Alcoa reported earnings that missed estimates and lowered its forecasts for the prized downstream businesses. While the company was expecting 10%-plus aerospace sales growth next year, now it says making projections is too hard amid slowing demand.

Investors who had cheered the separation--as Kleinfeld chases growth in aerospace and automotive markets after years of mining and smelting cutbacks--punished the stock on Tuesday. The 11% plunge was the steepest in seven years. Shares fell 2.6% at 10 a.m. Wednesday.

“He’s going to be the CEO of the value-add company, so I’m sure cutting guidance for the engineered products and solutions business, which should be the main growth driver going forward, probably was unpleasant,” Andrew Lane, a Chicago-based analyst at Morningstar Inc., said by telephone.

While maintaining a bullish long-term outlook for aircraft deliveries, Kleinfeld told analysts on a call that the industry’s transition is encountering near-term “teething problems.”

Company-wide quarterly profit excluding one-time items was 32 cents a share, Alcoa said Tuesday in a statement, missing the 34-cent average of 13 estimates tracked by Bloomberg. Total sales fell to $5.2 billion, less than the $5.33 billion average estimate.

The new value-added company will be called Arconic Inc., while the mining and metal-processing businesses will operate under the Alcoa Corp. banner.

A 1% revenue decline from the Arconic segments “reflects customer adjustments to delivery schedules in the aerospace industry, softness in the North America commercial transportation and pricing pressures, partially offset by strong North America automotive volume,” the company said.

Kleinfeld said the range of aerospace growth expectations is “absolutely huge” and that the company would start to provide guidance as it presents the separation to investors in a road show.

The stock was lowered to neutral from buy at Bank of America Corp., with analyst Timna Tanners citing the potential for the aerospace-focused downstream unit to struggle for the next several quarters.

Market Reset

“You’re mainly seeing a reset from weaker end markets, similar to what you’ve seen from other industrial stocks that had negatively pre-announced,” Justin Bergner, a Rye, New York-based analyst at Gabelli & Co., said in a telephone interview.

Honeywell International Inc. shares tumbled Friday after the company reported preliminary third-quarter profit below its forecast and cut the top end of the 2016 earnings target as sales slump for aircraft parts. Honeywell’s prediction that the business-jet market will remain weak next year fueled drops at other aerospace manufacturers such as Textron Inc., which produces helicopters and Cessna jets.

Alcoa made the following changes to its forecasts for the Arconic segments: Global rolled products targets revenue of $4.8 billion to $5 billion for full year 2016, down from $5 billion to $5.2 billion.Engineered products and solutions targets revenue of $5.6 billion to $5.8 billion, down from $5.9 billion to $6.1 billion, and an adjusted Ebitda margin of about 21%, down from 21 to 22%.Transportation and construction solutions targets revenue of $1.7 billion to $1.8 billion, from $2.1 billion, and an Ebitda margin of about 15%, unchanged.

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