MORGAN STANLEY: Here's what Alcoa is worth when you split up the company

Aluminium giant Alcoa announced Monday that it will split into two publicly traded companies.

It’s essentially a partitioning of its upstream and downstream businesses: The Upstream Company will be involved in mining and production, while Value-Add Co. will work on turning the raw material into products that aerospace and other industrial customers use.

In a Sept. 16 note to clients, analysts at Morgan Stanley assessed the value of Alcoa’s different business segments and pegged a valuation on each of them.

In a nutshell, the sum of the parts are worth much more than what the company is trading for right now. In that note to clients, here’s what they computed:

  • Alcoa’s upstream business is worth $US5 – $US9 billion. The Upstream business refers to the alumina and primary metals segments together. Their analysis estimates a free cash flow yield of 6.6% in the bear case, 8.8% as their base scenario, and 10.8% as their bull scenario.
  • Alcoa’s Global Rolled Products (GRP) downstream business is valued at $US3 – $US4 billion. That’s based on Kaiser Aluminium Corp. as a comparable stock, and its current valuation “reflects investor concerns about high negative FCF, high leverage, and repeated forecast downgrade.”
  • Alcoa’s Engineered Products & Solutions (EPS) downstream business is worth $US15 – $US18 billion. This includes precision parts for aeroplanes as well as products used in construction. The analysts use Berkshire Hathaway’s August 2015 acquisition of Precision Castparts as a model.

“Our Sum of the Parts analysis gives $US10-16/sh value with a base case of $US14/share,” the analysts concluded. “In our base case, we value the EPS segment at $US13 per share, the GRP segment at $US3 per share, and the upstream segments at $US6 per share. “

Alcoa closed at $US9.08 on Friday.

The analysts further wrote: “We are Overweight on Alcoa because we believe shares will re-rate on rising earnings contributions from higher growth end markets. Additionally, due to no LME price risk in the downstream segments, we expect investors to apply a higher multiple on downstream earnings, in-line with comparable industrial stocks.”

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