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Arconic Stock: 22% Yield Potential with Expected Earnings Recovery

Company Name: Arconic Corporation
Ticker: ARNC.US
Entry Price: $20.50
Target Price: $25.00
Projected Yield: 22%
Time Line: 3 to 6 months
Risk: High

About Arconic

Arconic is a US industrial company focusing on light metal processing. Arconic products are used throughout the world in aerospace, automotive, commercial, transportation, oil and gas, and other industries. The company arose when Alcoa Inc. was split into Alcoa Corp. (aluminum production) and Arconic Corporation (aluminum processing and engineering product manufacturing).

What's the Idea?

Capitalize on the stock that may rise with industry recovery, shortage of aluminum products, and support for US domestic manufacturers.

Buy Arconic Corporation Shares >>

Why Trade Arconic Corporation?  

Reason 1: Stable Financial Conditions

Despite a significant decline in earnings and margin, the company is still strong, financially. Arconic has a sufficient level of liquidity, which is $1.30 billion, of which $595 million is in cash. The debt burden is low, with a net debt to EBITDA ratio of 1.15x. The amount of debt is $1.276 billion, with the next repayment in 2025 in the amount of $700 million.

In Q2, the company increased its free cash flow, which turned out to be equal to $9 million. The current financial position of the company is favorable in today's economic environment. Arconic optimized operating costs by terminating some employees' contracts, temporarily reducing management and employees wages, and changing the work schedule. Besides, the capital expenditures were cut by $50 million in 2020.

As a result, the operating costs will be cut by $200 million, while the cumulative savings will increase by $250 million by the end of the year. The company expects to increase EBITDA by $300 million due to increasing productivity, optimizing operating costs and expanding its presence in automotive, packaging and industrial products.

Reason 2: Earnings Recovery Expectations

The COVID-19 crisis impacted Arconic Corp's earnings, which declined by 38.30% in Q2 2020, compared to the same period last year. The operating loss amounted to $67 million against $52 million in profit. The largest decline in earnings occurred in the transport and aerospace sectors. Meanwhile, packaging products showed an organic growth of 2% YoY. Despite the decline in earnings in some areas, the company has a few reasons to expect a recovery.

There is a deficit in the US aluminum packaging market, which amounts to $1.69 billion, with an aggregate demand of $6.36 billion. Arconic has the opportunity to partially compensate for the imbalance by commissioning its own facility in Tennessee with minimum capital expenditures, as well as by using additional capacities in Russia and China.

The recovery in the automotive market and the switch to electric vehicles could be a significant driver of Arconic's revenue growth in the short term. The company's portfolio currently includes over 60 contracts for various light metal transport platform supplies. In 2020, the company signed contracts to launch eight new transport platforms that should drive sales growth in 2021. Over the last few years, the demand for electric vehicles increased, and such vehicle production uses 15% to 27% more aluminum than traditional automotive production. This trend might further expand Arconic's portfolio and increase product demand.

An additional boost to Arconic's revenue recovery is aluminum import sanctions in the US, which are intended to support domestic producers. This is the second time that Trump imposed 10% duties on aluminum and aluminum imports from Canada, which he did in August 2020. These sanctions contributed to a 44% decrease in imports of aluminum sheet from January to May 2020, compared to the same period in 2019. These restrictions could help accelerate the recovery of Arconic Corp. industrial revenue.

Reason 3: Investment Banks Increased Target Price

In September, a few large banks raised their target price forecast for Arconic. While Benchmark confirmed the target price at $27, such large investment banks as Credit Suisse and Deutsche Bank set their estimates at $30 and $32, respectively. This means the outlook for Arconic Corp is mostly positive.

How to Use the Idea

  1. Buy Arconic Corporation stock at $20.50.
  2. Allocate no more than 2% to 4% of your portfolio amount. To build a balanced portfolio, you can use our analysts' recommendations for USD or EUR portfolios.
  3. Sell the stock when the price is at $25 per share.

How to Buy Arconic Corporation Shares 

If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.

After opening an account, you can buy shares in either of the following ways:

Freedom24 Web Platform: In the Web Terminal section, type ARNC.US (Arconic Corporation ticker in the NYSE) in the search box, and select Arconic Inc. in the results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.

Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that shows up, type ARNC.US (Arconic Corporation ticker in the NYSE) and select Arconic Inc. in the search results. You will then see Arconic Inc stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.

Buy Arconic Corporation Shares: Don't Miss The Post-Crisis Earnings Recovery!

Buy Arconic Corporation Shares >>

*Additional information is available upon request. Investment in securities and other financial instruments always involves risks of capital loss. The Client should make himself aware at his own accord, including to familiarize himself with Risk Disclosure Notice. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Commissions, fees or other charges can diminish financial returns. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and do not constitute an investment advice service. The recipient of this report must make their own independent decisions regarding any securities or financial instruments mentioned herein. Information has been obtained from sources believed to be reliable by Freedom Finance Cyprus Ltd or its affiliates and/or subsidiaries (collectively Freedom Finance). Freedom Finance do not warrant its completeness or accuracy except with respect to any disclosures relative to the Freedom Finance and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated.