24/7 Wall St. 2007 Break-Up Values: Alcoa $46 (Current Price: $32.15)

By Ryan Barnes. Edited By Douglas A. McIntyre

Alcoa Aluminum, Inc. (AA) – Price $32.15; Break-up Value $46

Alcoa is another company that has brought about some rumblings from the private equity community, both for the company’s low valuation and the possible liquidation of assets, many of which are not generating any meaningful returns for shareholders.  Of the companies 6 operating segments, only two – Alumina Production and Primary Metals Production – have operating margins over 6%.  The other four segments are carrying nearly $16b of assets on the balance sheet, over half of the company’s total of $31b (including goodwill) yet only generated 20% toward total net income. 

It is in paring off these other segments that any meaningful shareholder value can be found.  If Alcoa would be content to focus on just raw production, the company could support a valuation in the range of 12-14x operating earnings based on the solid revenue growth (over 20%) and operating margins over 30%.  This would give Alcoa a market cap of over $42 billion, or $42 a share, right off the bat. 

As for the other four segments, which all produce various end-products, a combination of liquidations and divestments could at the very least cover the costs to pay off all company debt and keep our $42 figure intact.  Current management may like the idea of having and end-product group, but when your biggest customers are U.S. auto makers, you know that prospects are not so great. 

In the end, the numbers don’t lie – the segments are not getting the job done for shareholders, and is seriously holding the potential valuation back. Which is probably the same thing private equity is thinking; they could gobble up the whole company, make their sales, and re-IPO the primary production company at the multiple range mentioned above. 

For the sake of analytics, we will value the other four segments (flat rolled products, engineered solutions, packaging & consumer, and extruded products) at 5x operating earnings, which would come to $3.7b and give us a total breakup value of $46 per share.

Ryan Barnes

Ryan Barnes has over 10 years’ experience in portfolio management and investment research, covering equities, fixed income, and derivative products. Ryan spent the past 5 years working as an institutional trader & manager for high-net worth investors, working with Merrill Lynch, Charles Schwab, Morgan Stanley, and many others.  Ryan is currently working as a writer and financial modeling consultant on hedging and capital appreciation strategies, and does not own securities in the companies being covered.

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