Alcoa Split: Stock Holders Rejoice As Bond Holders Worry

  • Alcoa CEO announced that the company will split in two.
  • Alcoa stock gained over 5% on the announcement.
  • In a contrasting move, Alcoa bond prices plummeted.
  • Alcoa's stock is still down 46% from 52-week highs.

Yesterday, as the Dow Jones Industrial Average fell over 300 points (1.9%), investors applauded the Alcoa split announcement.  Alcoa (NYSE:AA) closed the session up $0.52 or 5.7%.

The company has 59,000 employees world-wide working with bauxite, aluminum, energy, cast house, smelting and metals.  It provides the raw materials used in many industries, including automotive, food and beverage packaging, aerospace, transportation, construction, oil & gas, defense consumer electronics, power generation and industrial applications.

Alcoa's CEO, Klaus Kleinfeld, met with Jim Cramer on CNBC to talk about the split.  He discussed how in recent years Alcoa has added additional opportunities to the company's five businesses.  He expounded that the company has grown and reshaped their business units "to the right size, right strengths, and the right scale, so this allows us to put both businesses onto their path independently to pursue their own strategies, which are very distinct."

He mentioned participating in the growth of Alcoa's customers, including 9% growth in the aerospace industry and strong growth and ties in the automotive industry.  He also referred to the continued use of aluminum in jet engines.  Alcoa's growth is based in part on being the largest and among the lowest cost miners for bauxite and aluminum.  Kleinfeld has been CEO of Alcoa since 2008.

While investors pushed the company's stock higher, Alcoa bonds plummeted.  Not knowing which business units will be assigned to which of the two new companies, creditors feared they may be assigned to the less profitable business.  Bloomberg news reported that Trace, the bond-price reporting system, quoted that Alcoa's $1.25 billion of 5.4 percent notes fell 10.5 cents in mid-day trading to 94.5 cents on the dollar.  Moody's Investment Service has two ratings for Alcoa, both in the junk ranking category, as reported by Bloomberg.

Alcoa stock closed Monday's trading at $9.59 up $0.52 or 5.7%.  It was also up in after-hours trading.  Although bouncing 20% off the 52-week lows seen on August 24, the stock is still down 46% from its 52-week highs set last November at $17.75.

AA stock chart

Source: Alcoa stock price data by

Alcos Split Analysis

Based on the reaction in the market, investors in Alcoa stock are clearly pleased with the Alcoa split.  But will doing so really benefit both new companies?

The key appears to be in the CEO's statement that doing so will allow each to pursue separate, "very distinct" strategies.  If we take Kleinfeld at his word, then it is a good time to make the change.  Even at large companies, CEO's wear many hats, including Chief Spokesman for the company (and Kleinfelder did a good job at that today on CNBC).

However, Alcoa stock is still down heavily, along with commodities prices.  Sales have been flat for the past two years.  Earnings have been erratic: Alcoa had a $2.285 billion loss in 2013.  We will see in the coming weeks and months if the market continues to show Monday's enthusiasm about the split, or if currency headwinds and falling commodity prices outweigh this potentially positive long-term move.

Alcoa's split is expected to be completed in the second half of 2016.

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