Alcoa's Key Catalyst Is The Separation Of Its Businesses

Goldman Sachs’ Andrew Quail believes the sharp 11 percent decline in Alcoa Inc AA shares the day after Q3 results were announced was driven by the downstream guidance for 2016.

Quail maintained a Neutral rating on the company, while lowering the price target from $30 to $28.

The analyst also believes that investors were disappointed that Alcoa had not reaffirmed its earlier 2017 aerospace guidance.

“We believe aerospace performance will remain a key driver of share performance and flag our bearish outlook given overcapacity, most notably in the widebody market,” Quail mentioned.

Related Link: Primary Metals The Culprit In Alcoa's Disappointing Q3

The analyst views Q3 2016 as a disappointing quarter on various fronts, such as weak organic EBITDA growth at Engineering Products and Solutions, and weaker than anticipated performance from the Primary Metals segment.

Key Catalyst

“In our view, the key catalyst for the stock going forward is the imminent separation of the two businesses, upstream (Alcoa) and downstream (Arconic), due to occur on November 1, 2016,” Quail went on to say.

The analyst believes that this event would offer investors the choice of more concentrated vehicles to gain more targeted exposure across the aluminum business.

The 2016, 2017 and 2018 EPS estimates have been lowered 16 percent due to muted expectations for downstream.

The volume estimates have been lowered for several of Alcoa’s business units, “reflecting continued pressure in aero, US auto, and North American heavy duty truck.”

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