JPMorgan Offers 3 Scenarios On Arconic, Upgrades To Overweight

Arconic Inc ARNC shares received an upgrade from JPMorgan analyst Seth Seifman on Monday from Neutral to Overweight, although the price target was cut back from $30 to $28.

The company, which is in the midst of finding a new CEO, will announce its second-quarter results later this month. Seifman will be eyeing them closely having revised down his estimates for the year significantly.

Seifman’s new model continues to see execution risks and headwinds ahead, but a “material downside” of 10 percent would still imply a significant miss in EBITDA growth.

The analyst sees the potential for three scenarios to play out moving forward.

The Bear Case

Arconic could generate only a 4-percent EBITDA compound annual growth rate over 2018–2019, despite potentially solid topline growth. That topline would be driven by aircraft production and auto aluminization.

The effect would be an EBITDA of $2 billion, and likely $21 share price, down 9 percent from Monday’s open.

“Anything worse than this implies a true breakdown that we think is very unlikely,” said Seifman.

The Base Case

The most likely scenario, according to Seifman, is that the company’s EBITDA is just below guidance.

He estimates $4.4 billion in 2019, a 7-percent miss from the $2.4 billion guidance midpoint.

The estimate falls slightly below consensus, but Seifman notes:

1. The stock’s recent sell-off falls in line with this expectation.
2. The company’s structure is relatively new.
3. There are very few analysts covering the company.

The Bull Case

Seifman believes that if Arconic is to beat the Street, it will be because current guidance was purposely conservative.

The company noticeably missed its guidance last year, potentially forcing management to reign in their optimism.

Revenues 5 percent above the guidance midpoint with a 8.5x multiple would mean a bull case scenario with a $35 share price, a 50 percent gain.

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