ARNC - Arconic Corporation: Demand Is There But Also Uncertainty

2023-05-02 16:49:54 ET

Summary

• Arconic Corporation has been able to benefit from the increased demand for aluminum that happened in 2022, but as prices have dropped so have the company's margins.
• The aluminum market seems to have strong demand nonetheless and some experts are noting there could be another bull run for commodities.
• Right now, I don't think it is the time to buy a company like ARNC, but holding shares seems reasonable though.

Investment Summary

Arconic Corporation ( ARNC ) is a company that specializes in creating innovative materials and products for a wide range of industries. They produce aluminum, titanium, and nickel-based alloys, which are used to create strong and durable products such as castings, extrusions, and forgings. Arconic's materials are used in various sectors, including aerospace, automotive, defense, and building and construction, to name a few.

This large exposure to different niche markets has led the company to have a significant share of the market. But as the last earnings report showed, most companies in the aluminum sector have seen declines from last year's same quarter. In the case of ARNC, they saw a decline of around 9% and a net loss of $273 million. In the upcoming report , investors will be watching the margins especially to see whether or not the company is able to stabilize it and hedge against further losses. Right now, because of the uncertainties regarding margins but the overall positive outlook for the market, I think a hold rating is reasonable for ARNC.

Market Growth

With ARNC having exposure to many customers from various sectors, I think the company will benefit from a broad demand for aluminum for years to come. According to a report by Fortune Business Insights , they estimate the aluminum market to grow at a rate of 6.1% between 2022 and 2029. Such growth is likely to reflect in ARNC revenues in the coming years as they have a broad customer base with quite equal demand.

The report highlights the continued infrastructure development in countries such as China and India, where aluminum plays a vital role, as well as the increasing electrification of society. India is also a major catalyst for the aluminum market seeing as they are taking the number one spot for the country with the highest population . The need to build out infrastructure is there and quite frankly very necessary too which could increase the demand and need for aluminum. What worries me slightly is that this demand from India might not be seen too quickly in reports from ARNC as they currently don't have a significant portion of sales there. But with the sale of their Russian operations last year I think it's high time to start looking for new market opportunities for ARNC.

Upcoming Report

In the upcoming report , the expectations are that the company will post a yearly decline in revenues which I think is very likely given the lower commodity prices seen for aluminum compared to 12 months ago. What I think will be vital is looking at the margins, they have been taking a hit since last year and I think investors will be looking for any sign of an uptick which might indicate we are nearing a bottom.

Besides that, I think it will be important to see whether the company will be taking any steps to fill in the gap that was left by the Russian operations. In 2021 it amounted to around 11% of sales which is significant. The capital they got from the sale should be used towards building up a new stream of revenues from a country like India where demand seems to be strong for many years.

Financials

On a yearly basis, the balance sheet might not look that great as the company had a decrease in total assets, much because of the sale of Russian operations of around $230 million. Despite that though, the cash position was down year over year too, close to $80 million lower. Inventories remained strong however which I think reflects some of the relative demand still felt from the market.

With the company still having positive cash flows I want to see a higher cash position in the next report. It would bring some comfort in my opinion as it could help the company's ability to hedge and still invest in times like these where prices are volatile.

Moving over to liabilities it is great to see the long-term debt not increasing by a substantial amount, just $3 million. I think that when the company is generating around $150 million in cash flows still they are in a stable position to handle interest expenses of around $104 million quite safely. What might worry me slightly is the net debt/EBITDA ratio being around 2.59 right now. Although it is under my threshold of 3, seeing as the company might experience continued losses I am worried the debt will eventually catch up and become an issue.

Valuation & Wrap Up

Looking at the last 12 months p/e the valuation might suggest the company is undervalued a bit, but as estimates of future revenues reveal, the price right now might not be a great entry point. The p/e is increasing on a forward basis which indicates margins and revenues might continue sliding. As with most commodity companies, the best time to buy is often when the margins are horrible and the p/e sky high. I don't think we are at that point yet with Arconic and this is much of the reason I think a hold rating is fair for the moment.

The upcoming report will be vital to see where the trend is heading. If margins continue decreasing then it might not be time to buy just yet, if they are increasing, however, then it might indicate a shift in the trend and we are heading into another boom.

Apart from this, what also makes me have the company as a hold is the loss of Russian operations, a necessary move by the company, but it leaves room needing to be filled in my opinion. India could be a target I think but we have yet to see anything on this.

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