Alcoa (AA, Financial) is a global market leader in lightweight metals technology, manufacturing and engineering. The company has been one of the driving forces behind modern technological developments, thanks to its innovative products and aluminum smelting processes.
Alcoa’s technologies have been applied in various industries especially in transportation, including commercial and automotive transport to space and air travel. Its products have also been heavily used in the enhancement of industrial and consumer electronic products.
The company’s products are mainly made of titanium, aluminum and nickel, and it has also been said to manufacture the best alumina, bauxite and primary aluminum products.
However, the company has recently found it tough to maintain profit growth due to falling commodity prices. As such, the light metals firm has planned to split into two publicly traded entities, which will see its aluminum operations and automotive businesses operate separately in the future.
Alcoa CEO and Chairman Klaus Kleinfield, while speaking with regard to the split, said that it was best to split the company because it "allows us to put both businesses onto their own paths independently to pursue their own strategies, which are very distinct."
After the split, the value-addition business will trade under the Arconic segment whereas the upstream sections will operate under the new Alcoa segment.
Growth drivers for the Arconic section are expected to come from the company’s operations in sections like airplane and car production. In the most recent quarter, the Arconic segments gained an after-tax income of $269 million which is 8% higher than the same quarter last year. However, the revenue from these sections reduced by 2.2% to $3.3 billion.
In addition Alcoa reduced its forecast for 2016 revenue from Firth Rixson to between $1 billion and $1.1 billion, down from $1.6 billion previously. The company acquired Firth Rixson in 2014 and this is one of the business units that is expected to spur growth in the Arconic segment.
With regard to the current slowdown in sales from this unit, Kleinfeld said the company “will not be making the number we had originally intended for Firth Rixson this year, but we are working on it."
On the other hand, the new Alcoa Company will include the company's traditional sections that include the manufacture of aluminum, alumina and bauxite. While the Arconic business segment is likely to be significantly insulated from falling aluminum prices, the company’s core Alcoa business will continue to be affected.
So should you buy Alcoa now or after the split?
Last year, when Alcoa announced that it would split into two separate companies, the market reacted positively to the news, and Alcoa saw an upward price swing of about 5.7%. This indicates that the company probably would be better when operating as two distinct entities than as a single entity.
Late in the year, hedge fund manager Elliot Management disclosed its 6.4% stake in Alcoa thereby making it one of the top holders in the aluminum smelting company.
Elliott also said Alcoa's split would "create value substantially above the share price at the time." Since then, Alcoa added two Elliott Management nominees to its board.
Kleinfield has been at the center of Alcoa’s new direction steering it from being a pure play commodity manufacturer toward a more diversified engineering company. The split, which will be finalized later this year, would separate the commodity side of the business from the value-added section.
Now, while other investors will have the opportunity to invest in both Alcoa and Arconic after the split, present Alcoa shareholders will automatically have shares in the new company. Illustratively, present shareholders will get a share in the spinoff that is equal to their ownership in Alcoa as a percentage of the entire business.
For instance, if you have 20% of Alcoa, you will end up having 20% of Alcoa and 20% of Arconic, the value-added section, after the split.
From an investing perspective, buying shares of Alcoa before the split will mean that the investor is typically taking a gamble in the belief that Alcoa and Arconic will do just fine even after the split.
On the other hand, staying on the sidelines to choose which segment to invest in after the split is more cautious, but it could also mean missing a huge opportunity if the two independent units rally significantly shortly after the split.
However, judging by the manner in which the company’s shares reacted shortly after announcing the plans to split the company indicates that investors are optimistic that splitting is the right call. Therefore, expect a potential upswing in stock prices of both units when the split is complete and the Arconic segment is listed for trading.
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