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Arconic (ARNC) Plunges 31.6% YTD: What's Pulling It Down?

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A successful investor understands the importance of exiting certain underperformers at the right time to maximize portfolio returns. Selling off losers can be difficult, but if both the share price and estimates are falling, it could be time to get rid of the security before more losses hit your portfolio.

Arconic Inc. (ARNC - Free Report) is one such stock that you may want to consider dropping given its significant price decline year to date along with the earnings estimate revisions going downhill for the current quarter and the current year. A Zacks Rank #5 (Strong Sell) further confirms Arconic’s weak position in the market.

Shares of Arconic have lost around 31.6% year to date. The company has also underperformed its industry’s decline of roughly 6.6%.  

Let’s explore the aspects that are responsible for the downslide faced by this Zacks Rank #5 (Strong Sell) stock.

Tariff Challenges:

The company faces pricing pressure due to imposition of tariff on aluminium imports leading to higher input costs. According to the company, aluminum prices have shot up driven by LIFO (last-in, first-out) method of inventory accounting. It is adversely affecting Arconic's operating margins. Although the duration of the tariff effect is unknown, it is expected to end eventually.

Aluminum prices also rose 20% in the most recent quarter hurting operating margin by $37 million. The prices are rising sharply in the wake of aluminum tariffs and Russian sanctions. The company expects to face an unfavorable impact of $45-$55 million from elevated aluminum prices in second-quarter 2018. It also currently sees an unfavorable impact of $100 million in 2018. Arconic has reduced its earnings guidance for 2018 factoring in headwinds from higher aluminum prices.

Market Instability:

Arconic is exposed to softness across certain end-use markets. The company is seeing lower sales in industrial gas turbine market due to weak market conditions. The heavy-duty truck and trailer market in North America, although recovered somewhat of late, remains affected by lower build rates. Arconic is also seeing softness in the packaging market. It is ramping down production at its Tennessee packaging business and plans to exit that business in 2018. The company expects its industrial markets to be flat in 2018.

Leverage Concerns:

The company is concerned about the high leverage. The company is carrying essentially all of Alcoa Corporation’s (AA - Free Report) debt, following the business separation. While the company is taking actions to cut debt, it still has substantial long-term debt of roughly $6.3 billion as against cash and cash equivalents of roughly $1.2 billion.

Downward Estimate Revision

For the full year, we have seen four estimates moving down in the past 30 days, compared with no upward revisions. This has caused the consensus estimate, going from $1.49 a share a month ago to its current level of $1.24. The downward trend in earnings estimate revisions indicate that the odds in favor of an upside in the near term are slim.

For the current quarter, Arconic has seen four downward estimate revisions versus no revisions in the opposite direction, dragging the consensus estimate for earnings down to 30 cents a share from 40 cents over the past 30 days.  

Other Bearish Readings

Return on Capital (ROC) of Arconic is 5.1% compared with 7.8% for the industry. Arconic’s trailing 12-month ROE undercuts its growth potential. The stock’s current ROE stands at 11.4% compared with the industry’s ROE of 16.6%.

The debt-to-equity ratio is a good indicator of the financial well-being of a company. To this end, Arconic seems to be a highly leveraged stock with a reading of 54.4% compared with 47.1% for the industry.

Furthermore, the stock has a VGM Score of D, which dampens its appeal. Here, V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores.

Arconic Inc. Price and Consensus

Arconic Inc. Price and Consensus | Arconic Inc. Quote

Stocks to Consider

Some other better ranked companies in the basic materials space worth considering are FMC Corporation (FMC - Free Report) and Huntsman Corporation (HUN - Free Report) . Both the stocks sport a Zacks Rank #1 (Strong Buy).  You can see the complete list of today’s Zacks #1 Rank stocks here.

FMC Corp has an expected long-term earnings growth rate of 13.6%.  Its shares have gained around 22.2% over a year.

Huntsman has an expected long-term earnings growth rate of 8.3%.  Its shares have moved up around 27% over a year.

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