When Alcoa Inc. presents its last quarterly earnings report as a single company on Tuesday, investors will still be wondering how the iconic aluminum maker's bet to split in two will pay off.
Klaus Kleinfeld, who has led the company since 2008, is separating the company's beleaguered raw aluminum operation on Nov. 1 in a bid to increase the combined value of the spinoff, which will keep the Alcoa name, and the parent firm, which will become Arconic. The latter will house the company's fast-growing businesses supplying the aerospace and automotive markets.
Alcoa's raw aluminum enterprise, which it pioneered in 19th century Pittsburgh, has been rocked this decade by an aluminum glut generated largely by China. That oversupply has caused prices on the London Metal Exchange to fall to around $1,600 a ton, down from around $2,500 a ton five years ago. In 2015, the company reported a net loss of $121 million, compared with a net profit of $268 million in 2014.
After a reverse stock split, Alcoa's stock price is now just above $30 per share, less than a third of its adjusted value at the start of 2008, the year Mr. Kleinfeld took over as chief executive.
In a news release touting the split, Mr. Kleinfeld, who will be CEO of Arconic, said he and his colleagues were "launching two leading-edge companies, each with distinct and compelling opportunities, and each ready to seize the future."
Analysts say they'll be studying the third quarter release for more detail about how the companies will be carved up. The company is putting out its release on a Tuesday morning, instead of the customary Monday afternoon, because of Columbus Day.
The split should force the mining and smelting divisions to run more efficient operations because they will no longer be allowed to hide behind profits in other units, say analysts. However, the spinoff also creates extra work that will eat away at time and money. "For example, you might need more people to manage procurement across two companies," says Andrew Lane, an analyst with Morningstar, Inc.
So far, says Mr. Lane, "we see the split as value neutral."
The case made for Arconic is based on the massive boom in global aerospace, driven by the rapid growth of low-cost airlines and the emergence of more efficient aircraft. Airbus Group SE and Boeing Co. together have a $1.6 trillion backlog of more than 12,500 jet orders, with many models sold out for several years. These planes will require a steady stream of fasteners, screws and other parts, made out of high-tech alloys that do things like repel lightning.
The engineering to make these high-tech widgets will be the cornerstone of Arconic's game. Already, Alcoa has invested billions in research and in buying companies like U.K. jet-engine parts maker Firth Rixson Ltd. and Pittsburgh-based RTI International Metals Inc.
Those investments are paying off. In the second quarter, sales in Alcoa's engineered products and solutions business increased to $1.5 billion from $1.3 billion in the same quarter a year ago. By comparison, sales in the smelting division fell to $1.6 billion from $2.1 billion.
In total, the aerospace-related businesses have signed around $15 billion worth of supply deals with companies including Boeing, Airbus, and Lockheed Martin Corp.
Arconic will also take over a lucrative business selling sheet aluminum to Ford Motor Co. for its F-150 pickup truck. However, other auto makers have yet to make similar high-profile announcements of converting their vehicles full-bore to the lighter aluminum.
Meanwhile, to cope with weak prices, Alcoa has been closing high-cost smelters in the U.S. The new Alcoa will be a global company reliant on smelting aluminum in places where energy is cheap, like Canada, Iceland and Saudi Arabia.
Global markets, however, still face years of headwinds, mainly because of China's supply glut. At a trade hearing in Washington last month, a senior Chinese aluminum official said China would "certainly build more" aluminum factories to keep pace with its own demand. Chinese aluminum exports, which Mr. Kleinfeld has called a "major driver" of lower prices, last year increased 5.3% to $23.8 billion.