Research (Updated April 25, 2017)

“It is pretty clear that leading up to this Elliott Management had some pretty fair points about lack of independence of the board…There are other board members who lack independence.” – Matthew Miller, CFRA Research

“I think that bringing in Lawson will be a positive catalyst for the stock. If they [Elliott] are successful the company will have a better focus on secular growth.”

– Matthew Miller, CFRA Research

“Klaus Kleinfeld has announced he is stepping down as CEO. Obviously, this is a huge win for Elliott Management which has spearheaded this push for regime change.” – Don Bilson and Eric Wiley, Gordon Haskett Research

“We see “valuation” re-rating as the driver for stock performance over the next few quarters as investors now weigh the increasingly likely outcome that Larry Lawson, Elliot’s prime candidate to succeed Klaus to become the next CEO. Given Mr. Lawson’s background as a turn-around/cost-cutting style executive investors may assign a higher multiple to Arconic’s current base-line guide as there will be a mounting expectation that these goals could prove conservative under a more aggressive management style. The delivery on EBITDA growth may accelerate from prior “3-5 year” path Arconic has articulated – Deutsche Bank

“Clearly, Arconic’s Board has lost credibility given disclosures which have come to light and authorizing the spending of millions in a bid to maintain their status quo. Our read-thru is Dr. Kleinfeld’s decision clears roadblocks and more departures will follow.”

– Jorge Beristain, CFA, Deutsche Bank

“With the departure of Mr. Kleinfeld, the Board has now asked Elliot whether they “seek to continue to burden Arconic and its shareholders with proxy fight”, or to support Arconic’s Board in finding a new CEO and a [sic] facilitate a smooth transition? Elliot has fired back that it, correctly, sees the Board as part of the problem. Having had multiple chances to correct prior lapses in judgment that have come to light under Elliot’s lens such as non-disclosed vote lock-up agreements and a $500m poison pill, Elliot will continue to press this recent advantage across the finish line” – Deutsche Bank

“As the Arconic proxy vote nears, we recommend our clients to vote with Elliot Management (Blue Proxy).” – The Spin-Off Report, By PCS Research Services and Institutional Research Group

“As a known quantity in the aerospace community, Lawson would be a valuable resource for ARNC, in our view; both operationally as well as with investors.”

– Seaport Global

“The removal of Kleinfeld addresses one of Elliott’s primary goals; however, it also may strengthen their hand” – Seaport Global

“We continue to believe regardless if all of Elliott’s points are addressed, there are likely significant cost savings to be had in ARNC’s structure. Therefore, we believe today’s announcement [regarding Dr. Kleinfeld’s departure] is a positive step in that direction. – Seaport Global

“The one name mooted thus far is Larry Lawson and Arconic would likely benefit from his operational skills. He and his team at Spirit took a poorly executing company and delivered consistently solid operating performance and cash generation that exceeded expectations.”

– Seth M. Seifman, CFA AC, Michael S Rednor, CFA, Benjamin E Arnstein, CFA and Shivang Badaya, J.P. Morgan North American Equities Research

“Firth Rixson in particular has been a major disappointment.” – Seth M. Seifman, CFA AC, Michael S Rednor, CFA, Benjamin E Arnstein, CFA and Shivang Badaya, J.P. Morgan North American Equities Research

“ARNC is up ~45% YTD vs. ~6% for the S&P 500, primarily due to Elliott’s proxy campaign.” – Seth M. Seifman, CFA AC, Michael S Rednor, CFA, Benjamin E Arnstein, CFA and Shivang Badaya, J.P. Morgan North American Equities Research

“If we assume that Arconic can reach Elliott’s EBITDA targets in 2019, this would add $0.50-1.00/share to our EPS estimate of $2.15 and with EPS of ~$3/share in 2019, the stock could be worth over $40 assuming a multiple near 15x – Seth M. Seifman, CFA AC, Michael S Rednor, CFA, Benjamin E Arnstein, CFA and Shivang Badaya, J.P. Morgan North American Equities Research

“Elliott’s work here is detailed, extensive, and insightful. We agree with Elliott that Arconic can perform better and that a leadership change would help, and the company is now headed in that direction.”

– Seth M. Seifman, CFA AC, Michael S Rednor, CFA, Benjamin E Arnstein, CFA and Shivang Badaya, J.P. Morgan North American Equities Research

“Arconic has hurt itself, with the primary misstep being the acquisition of Firth Rixson for $2.85 bn in 2014.” – Seth M. Seifman, CFA AC, Michael S Rednor, CFA, Benjamin E Arnstein, CFA and Shivang Badaya, J.P. Morgan North American Equities Research

As the Arconic proxy vote nears, we recommend our clients to vote with Elliot Management (Blue Proxy). When looking objectively at the data (margins, growth, returns on cap-ex, and performance vs peers) we think a change in management is warranted and would be well received by the market. Given shares were trading at ~$31 per share after Elliot Management announced their intention to reshuffle the board and oust Klaus Kleinfeld – we think there is a strong likelihood that shares retrace to those highs post the vote in May, with the potential to move towards our fair value target of $41 per share over the next 12 months. – The Spin-Off Report, By PCS Research Services and Institutional Research Group

“A change in management style would confer more conviction in ARNC’s ‘undisturbed’ margin expansion plan.”

– Gautam Khanna and Bill Ledley, Cowen and Company

“The stock has risen 19% since Elliot’s activist slide presentation was published on 1/31 vs. a 3% rise for the S&P 500 and XLI… making the 5/16 shareholder vote the most important catalyst for the stock. – Gautam Khanna and Bill Ledley, Cowen and Company

“If a mgmt. change is made…we believe C18E FCF could rise by as much as $100-300MM… – Gautam Khanna and Bill Ledley, Cowen and Company

“A CEO change is inevitable.”

–The Spin-Off Report, By PCS Research Services and Institutional Research Group

“We anticipate volatility around Arconic’s share price as we continue through Elliot’s proxy battle. That being said, we think investors that weather the volatility will be handsomely rewarded, and are strongly recommending Arconic shares for purchase.” – The Spin-Off Report, By PCS Research Services and Institutional Research Group

“You see, going back to the days when Arconic was named Alcoa, you’ll see that only between 55%-60% of the eligible votes are cast in ARNC elections. So  let’s say that number is 70% this year.  This means about 306m shares will be cast and Elliott needs a little more than 150m votes to get its nominees elected. As of February 27, it owned 51m shares and had exposure to another ~7m shares through derivatives.  Beyond that, it has support from First Pacific and Orbis, which are good for another ~32m shares. With that total in mind, Elliott is more than halfway to the total it needs – Don Bilson and Eric Wiley, Gordon Haskett Research

We believe there is substantial room for margin improvement across all aspects of the business and especially in the EPS segment.

– Credit Suisse

“We are increasing our medium term earnings forecasts and our price target to $33 for Arconic, as we now incorporate more substantive cost reductions… Our segment analysis and peer benchmarking suggest more material cost down potential at ARNC and improvements to asset turns as the market recovers. Our analysis skews towards the “low case” of improvement outlined by Elliott in their Jan 31st presentation (newarconic.com) and we see the potential for more radical change both from at a broader portfolio level and with respect to corporate overhead if the shareholder base aligns with Elliott’s views. – Credit Suisse

We see as much as 20% downside if Kleinfeld continues as CEO.

– Gordon Haskett

“EPS and PCC Comparison is Warranted: While ARNC has a relatively small large structural castings business at La Porte (~$300mm), the EPS segment is a global leader in medium sized castings and fasteners. Our analysis suggests EPS should be able to close the gap with PCC to within 100-150bp.” – Credit Suisse

“In our view, a new CEO is an important positive catalyst to more expeditiously improve the company’s operations and increase its margins while rationalizing capital expenditures / M&A opportunities.” – Wolfe Research

“If the company’s largest shareholder is not successful in effecting change, the company’s management may remain entrenched and not realize the margin expansion opportunities as soon as we expect.” – Wolfe Research

“For the EPS segment, Arconic’s margins are on a long term average ~650 basis points lower Precision Castparts and we assume margins improve to that of Precision Castparts.”

– Wolfe Research

“Apart from industry fundamentals improvement, the special situation thesis for Arconic is chiefly a ‘self-help’ story of new leadership more expeditiously improving the cost structure in addition to improving capital allocation… Our analysis suggest fair value for Arconic of ~ $43 if the improvements occurred holding the current fundamentals of the company constant. – Wolfe Research

“We are of the view that there is considerable margin / revenue expansion opportunity at the company as highlighted by our updated bull case ($40 per share). We believe potential opportunities to reach a compromise could possibly be found through asset sales, a bolstered management / board, and / or cost cutting efforts.” – Morgan Stanley Research

“We also acknowledge activism could create an opportunity to highlight value that is even higher at $40 (and in the range of the activist target) to account for significant margin expansion from current levels, premised on a market P/E of 17x and earnings of $2.37.”

– Morgan Stanley Research

“Airframe de-stocking, NA heavy duty truck, and Tennessee Packaging weakness led to a ~9% decline in revenues, even with record auto sheet shipments;” – Morgan Stanley Research

“Rating: Buy…Mid-point of Elliott’s cost-cutting driven EBITDA scenarios implies ~$14/sh upside to DB’s revised $28 Price Target (prior $27) which remains based on 8.5x (unchanged) 2018E EV/EBITDA.” – Jorge Beristain, CFA, Jeremy Kliewer and Chris Terry, Deutsche Bank

Our analysts currently have a price target for ARNC of $36 per share, but that number could be conservative if Elliot is able to make the proposed changes to the board and bring in Larry Lawson as the new CEO, who has an incredible track record of maximizing shareholder value at his previous posts. Despite ARNC running up over 30% since our recommendation, we still strongly recommend purchasing the stock at current levels.”

– The Spin-Off Report, By PCS Research Services and Institutional Research Group

“In line with our analysts, Elliot makes the contention that Arconic’s EPS segment dramatically lags its peers, specifically, Precision Cast Parts (NYSE: PCP), which is a nearly identical business in terms of product mix and end markets. PCP’s EBITDA margins nearly double that of Arconic, and it is the contention of Elliot that the gap should close completely over the next couple of years with a new management team in place.” – The Spin-Off Report, By PCS Research Services and Institutional Research Group