U.S. stocks are lower in late Tuesday morning trading, with the Dow Jones Industrial Average (^DJI +1.24%) and the S&P 500 (^GSPC +1.46%) down 0.78% and down 0.58%, respectively, at 11:45 a.m. EST. It's carnage in the mining sector following the announcement by Anglo American plc that it is suspending its dividend and embarking on a "radical restructuring programme" that will see the company shed nearly two-thirds of its workforce! Shares of aluminum heavyweight Alcoa Inc are no exception to the trend, declining 3.76%.
Titanium bulkheads for the F15 jet fighter before and after pressing by the Alcoa 50,000 ton press.
In fact, the shares are underperforming the SPDR S&P Metals and Mining ETF by a couple of percentage points this morning. That seems unjust and highlights what looks like a genuine opportunity. Indeed, if investors are lumping Alcoa in with ordinary miners, that's a mistake.
Indeed, Alcoa has shifted its focus from bauxite mining, alumina refining, and aluminum production to high-performance engineered products, largely through a series of acquisitions.
In July, for example, Alcoa completed the acquisition of RTI International Metals, a leader in titanium and specialty metals products.
Just six days prior to announcing the RTI acquisition in March, Alcoa completed the acquisition of TITAL, a leading manufacturer of titanium and aluminum structural castings for aircraft engines and airframes.
In September, Alcoa announced the logical culmination of its transformation: It will spin off its upstream business (mining, refining and aluminum production) to focus on what it is now calling the "Value-Add company."
The business that will remain generated 40% of its trailing-12-month revenues to the end of June from the aerospace industry. Supplying engineered components to the aircraft manufacturers is an oligopolistic business in which participants benefit from a genuine competitive moat.
It's no coincidence that Berkshire Hathaway decided to acquire aerospace parts supplier Precision Castparts Corp. this year -- Warren Buffett's largest-ever acquisition.
It's not hard to understand how a spinoff might benefit shareholders: Alcoa's global aluminum peers trade at a median enterprise value-to-EBITDA multiple of 4.9 against 12.5 for global aircraft parts manufacturers (Alcoa is valued at 7.6 times, if you're wondering).
(Enterprise value is the equity market capitalization plus net debt. EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of cash flow.)
Some very smart investors have recently identified value in Alcoa, namely hedge fund managers Elliott Management and the Baupost Group, the latter of which opened its position in the third quarter. With Alcoa shares now trading at roughly a 10% discount to their volume-weighted average price in the third quarter ($9.72), it's time value-driven investors took another look at this emerging gem.
