Shares of Alcoa Inc. (NYSE: AA) rallied 5.7 percent yesterday on news that the 127-year-old company would be split in two. Alcoa currently has four main operating segments that comprise two main groups: value added and raw aluminum mining and processing. The split would separate the value added business from the business of producing raw aluminum and other minerals.
“It has allowed us to build those two business into the right size, the right strength and the right scale,” Alcoa CEO Klaus Kleinfeld stated about the split in an interview with CNBC. “So this allows us to put both businesses onto their own path independently, to pursue their own strategies, which are very distinct.”
Even with yesterday’s news about the split, Alcoa stock was down 39.2 percent in 2015, compared with a decline of 10.2 percent in the Dow Jones Industrial Average (^DJI). Alcoa had been a member of the widely followed average until September 2013, when it was dropped after more than 54 years, formerly trading under the name Aluminum Company of America.
Over the past 25 years, prices of aluminum have ranged between $0.50 and $1.40 per pound and have been in a downward trend over the past several years. Prices currently sit at $0.71 per pound.
Weakness in the price of aluminum has undoubtedly hurt Alcoa. Current Wall Street consensus analyst estimates had been calling for EPS figures to shrink 51.6 percent this quarter, 57.6 percent next quarter, and 15.2 percent this year. Next year, before the split announcement, Alcoa’s EPS was expected to rise 9.0 percent and then grow at an annual rate of 9.6 percent annually over the next five years. Consensus estimates for full year 2015 EPS figures had been taken down by 20.0 percent from $0.97 to $0.78 per AA share over the past 90 days and 2016 figures had been reduced by 25.0 percent from $1.13 to $0.85.
The Alcoa aluminum and mining business, which it has been engaged in since 1888, has been hurt hard with the decline in aluminum prices. While it’s “value added” transportation, engineering and construction business have seen more prosperity.
CEO Kleinfeld discussed the “valued added” business with Jim Cramer from CNBC, stating that forty percent of the value added Alcoa business is aerospace, which is growing at 9 percent annually. Jim Cramer compared the business segment to Precision Castparts Corp. (NYSE: PCP) and noted that Warren Buffet recently took a large position in that company, which could be interpreted as a positive sign for the group as a whole. Cramer also noted that this value added business it not “levered to GDP” any longer.
Kleinfeld noted that in addition to aerospace, the value added business also includes automakers and a “whole range” of other segments. The Alcoa CEO stated that the company is a leader in the automotive segment and that it is a growth industry as well. He then went on to discuss Alcoa’s strength in “aluminization” and the “multi materials” of the jet engine business, the aero-structure business, and that Alcoa has recently introduced “revolutionary” micro mill techniques. Kleinfeld also discussed a new partnership with Ford Motor Co. (NYSE: F) using this new micro mill process. The Alcoa head sees all of these developments as “exciting” and “profitable” opportunities for the company to continue to grow in coming years.
Jim Cramer then asked about the raw aluminum mining business, referring to it as “non-value added,” perhaps for lack of a better term, noting that other companies have split “valued added” from “less value added” and investors got “killed,” citing potential decreased demand from China.
CEO Kleinfeld pointed out that the “less value added” company is not a pure aluminum play; that it also comprises a very strong bauxite business and that bauxite is a commodity that remains in short supply in China, and stated that from a cost standpoint, Alcoa’s aluminum and alumina business are very competitive. Kleinfeld also noted the flexibility of Alcoa’s energy assets, in that the company can sell into the market or use them as needed.