Buy Viad Corp: Business Is Humming

Executive Summary: Go long Viad Corp.  The current multiple of 19X 2018E earnings is fair for current earnings, but management has been very proficient at growing earnings and should continue to do so.  The earnings growth potential is significant here, through organic growth and accretive M&A. 

Key points to the long thesis:

1) Viad Corp operates in two segments: Global Events and Travel & Recreation.  The Global Events business is low margin but they are market leaders.  The Travel business is high margin but cyclical. 

2) The management team is solid and very shareholder focused.  They have done well for shareholders in the past.  High IRRs on historical acquisitions, high quality product offerings in both segments which has led to very good operating metrics and market share.  There was even a special dividend to shareholders.  

3) Both Events and Travel segments offer growth in both segments.  On Events, they believe they can get greater share of wallet from customers due to their enhanced Audio/Visual offerings from their recent ON acquisition, as well as a new U.S. product introduction (a SAAS platform for event registration and analytics).  On Travel & Recreation, which is their 50%+ EBITDA business but with cyclicality of course, on using free cash flow to purchase more experiential assets akin to their current portfolio of attractions.  Their T&R business reminds me a lot of theme parks, with a captive audience and ability to upsell higher margin food & beverage products. 

4) Operating metrics are humming.  You're paying 19X 2018E EPS, which is likely going to be flat vs. 2017E due to a drop off in non-annual events, but longer term, I think the business has good growth prospects. Cash flow is strong, CAPEX is low relative to EBITDA (EBITDA less CAPEX is around $60MM), there's a dividend and a share repurchase program in place. Net debt is around $143MM.

5) As the two segments grow, the company may decide to break up the company into two, resulting in a valuation boost from the current conglomerate discount. 

Detailed analysis 

Here's a quick description of the company:

"Viad Corp is an international experiential services company. The Company has operations in the United States, Canada, the United Kingdom, continental Europe and the United Arab Emirates. The Company conducts its operations through three business segments: the Marketing & Events U.S. Segment (U.S. Segment), the Marketing & Events International Segment (the International Segment) (collectively, the Marketing & Events Group), and the Travel & Recreation Group. The Marketing & Events Group, which includes the operations of Global Experience Specialists, Inc. (NYSE:GES), is a global provider for live events. The Travel & Recreation Group provides experiential travel services in iconic locations. The Marketing & Events Group, through GES, produces exhibitions, congresses and conferences, corporate events, consumer events, exhibits and entertainment experiences. The Travel & Recreation Group has a collection of hotels, lodges, recreational attractions and transportation services."

There are two segments. The GES business is not a high margin business, but it is growing leaps and bounds, organically and they are in acquisition mode. The Travel business has better margins but the organic growth is more muted (but still positive at 10%+) and they are making acquisitions.

Here are the headlines from the Q3 2016 earnings release:

"Revenue of $382.5 million increased 49.4% ($126.5 million) year-over-year or 40.4% ($103.3 million) on an organic basis (which excludes the impact of acquisitions and exchange rate variances).

• The organic revenue growth reflects positive show rotation at GES and strong underlying performance at both business groups.
• The acquisitions of Maligne Lake Tours (January 2016), CATC (March 2016) and ON Services (August 2016) contributed incremental revenue of $31.2 million.
• Exchange rate variances had an unfavorable impact on revenue of $8.0 million.

• Adjusted segment operating income, adjusted segment EBITDA and income before other items improved compared to the prior year quarter primarily due to high flow through on the increase in revenue."

The market cap has increased rapidly as the good news has come out and has run up to $896MM and the forward P/E stands at around 19X.

Now the news is definitely positive here. Let's dig a little deeper into the segment results:

"GES revenue of $287.0 million increased 52.0% ($98.1 million) year-over-year. On an organic basis, which excludes the impact of acquisitions and exchange rate variances, revenue increased 52.0% ($98.3 million).

• U.S. organic revenue increased 51.5% ($76.4 million), primarily due to positive show rotation of approximately $67 million, new business wins and base same-show revenue growth of 3.0%.
• International organic revenue increased 53.5% ($24.0 million) from the prior year quarter, primarily due to positive show rotation of approximately $18 million, new business wins and same show growth.
• GES adjusted segment operating income of $15.3 million* increased $29.8 million year-over-year, or $29.6 million on an organic basis.
• • U.S. organic adjusted segment operating income of $14.1 million* increased $23.0 million primarily due to higher revenue and strong operating leverage.
  • International organic adjusted segment operating income of $0.9 million* increased $6.5 million primarily due to higher revenue and strong operating leverage.
• The acquisition of ON Services contributed revenue of $7.8 million, adjusted segment operating income of $0.5 million* and adjusted segment EBITDA of $1.7 million* during the 2016 third quarter, in line with prior guidance."

We have to watch out for acquisitions. Companies that are built on acquisitions can become very tricky.

Let's look at the Travel segment.

"T&R revenue of $97.4 million increased $30.3 million (45.2%) year-over-year. On an organic basis, which excludes the impact of acquisitions and exchange rate variances, revenue increased $7.0 million (10.4%) primarily due to higher passenger volumes at the attractions and higher RevPAR across the hospitality portfolio.

• T&R adjusted segment operating income of $44.2 million* increased $14.8 million. On an organic basis, operating income increased $4.6 million (15.5%) primarily due to high-margin revenue growth from attractions and hospitality assets.
• The acquisitions of Maligne Lake Tours and CATC contributed revenue of $23.4 million, adjusted segment operating income of $10.3 million* and adjusted segment EBITDA of $12.7 million* during the quarter, exceeding prior guidance."

Management gives quite a few metrics to measure the performance of the Travel business. And it is going gangbusters. Here are the metrics:

	Q3 2016	Q3 2015	y-o-y Change
$ in millions
Revenue	$ 97.4	$ 67.1	45.2%
Organic Revenue*	74.0	67.1	10.4%
Adjusted Segment Operating Income*	$ 44.2	$ 29.4	50.5%
Adjusted Segment Operating Margin*	45.4%	43.8%	160 bps
Adjusted Segment EBITDA*	$ 49.3	$ 31.9	54.3%
Adjusted Segment EBITDA Margin*	50.6%	47.6%	300 bps
Key Performance Indicators:
Same-Store RevPAR(1)	$179	$161	11.2%
Same-Store Room Nights Available(1)	89,193	88,664	0.6%
Same-Store Passengers(2)	941,066	822,480	14.4%
Same-Store Revenue per Passenger(2)	$31	$30	3.3%

There's a couple of neat things happening here. First, Same-Store RevPAR is up big time at 11%, while Same-Store Room Nights Available are flat. Prices up, supply constant. Me likes. Same-Store
Passengers are up big time, as is Same Store Revenue per Passenger.

Here is how they define each term:

(1)

Same-store RevPAR is calculated as total rooms revenue divided by the total number of room nights available for all comparable T&R properties during the periods presented, expressed on a constant currency basis. Comparable properties are defined as those owned by Viad for the entirety of both periods. Accordingly, the third quarter comparisons exclude CATC.

(2)

Same-store revenue per passenger is calculated as total attractions revenue divided by the total number of passengers for all comparable T&R attractions, expressed on a constant currency basis. Comparable attractions are defined as those owned by Viad for the entirety of both periods. Accordingly, the third quarter comparisons exclude Maligne Lake Tours and CATC. Same-store passengers and revenue per passenger were affected by the partial closure of the Banff Gondola during the 2016 third quarter; although its lift operations were re-opened on May 1, the dining and retail services previously offered at its upper terminal remained closed for renovations into the latter part of the third quarter.

So this is all good news. Business is strong and growing.

Now on to Capital Structure (from the release):

"Cash Flow / Capital Structure

• Cash flow from operations was $61.0 million for the 2016 third quarter.
• Capital expenditures for the quarter totaled $12.0 million, comprised of $6.4 million for GES and $5.5 million for T&R.
• Return of capital totaled $2.0 million for the quarter (which represented quarterly dividends of $0.10 per share). Viad had 440,540 shares remaining under its current repurchase authorization at September 30, 2016.
• Debt proceeds (net) totaled $63.1 million for the quarter, reflecting the cash payment of $87 million for the acquisition of ON Services.
• Cash and cash equivalents were $52.7 million, debt was $196.0 million and the debt-to-capital ratio was 34.0% at September 30, 2016."

This is a good business. Cash flow is strong, CAPEX is low relative to EBITDA (EBITDA less CAPEX is around $60MM), there's a dividend and a share repurchase program in place. Net debt is around $143MM.

This looks like a good business to own. There's a need to better understand size of the industry, market fragmentation, management philosophy around acquisitions etc. But based on the financials, it certainly seems like the business is humming and you want to be part of the success.

Aclaris Therapeutics: Interesting Upside

"Aclaris Therapeutics, Inc. is a clinical-stage specialty pharmaceutical company. The Company is focused on identifying, developing and commercializing differentiated drugs for the treatment of dermatological indications. The Company's lead drug candidate, A-101 Topical Solution, is a high-concentration hydrogen peroxide topical solution that the Company is developing as a prescription treatment for seborrheic keratosis (SK), a non-malignant skin tumor. The Company has completed over three Phase II clinical trials of A-101 in over 300 patients with SK. The Company has initiated a Phase II clinical trial of A-101 for the treatment of common warts. In addition to A-101, the Company is also developing A-102, a topical gel dosage form of hydrogen peroxide, for the treatment of both SK and common warts. It has in-licensed the rights to inhibitors of the Janus kinase (JAK) family of enzymes, for specified dermatological conditions."

This is an interesting clinical stage company. I think its worth following and probably worth a small allocation. It could have upside if their clinical stage drugs actually prove successful and achieve FDA approval. It's hard to estimate what fair value of the stock should be, but the target market is big and in fact they focus on dermatology, which has a nice reputation for long lived products sold at decent prices to a wide audience.

Of course, it has zero revenues and so small size is appropriate here in terms of portfolio positioning.

Sunworks: Low Quality "Asset-Lite" Business

From the 10-K:

"We provide photo voltaic ("PV") based power systems for the residential, commercial and agricultural markets in California and Nevada. Through our operating subsidiaries, we design, arrange financing, integrate, install and manage systems ranging in size from 2kW (kilowatt) for residential loads to multi MW (megawatt) systems for larger commercial projects. Commercial installations have included office buildings, manufacturing plants, warehouses, and agricultural facilities such as farms, wineries and dairies. The Company provides a full range of installation services to our solar energy customers including design, system engineering, procurement, permitting, construction, grid connection, warranty, system monitoring and maintenance."

The question I ask is: How does Sunworks actually have 27% gross margins? I can not see how they add value. They purchase material from 3rd parties, use 3rd parties for financing and pay 3rd parties for installation. Where in the chain are they adding value to justify a 27% gross margin? If they are simply a logistics company, then 27% gross margins seem very high. Why can't manufacturers of solar panels like First Solar just undercut them?

This seems like a long shot at best. You should always be wary of "asset-lite" models unless there is significant IP behind the company. In this case, I can not see a reason in the long term for them to be very profitable.

If you look at their income statement, the R&D was ZERO last quarter. So no IP to speak of except this weird mention of 3-D solar cell technology which they have practically done zero testing or prototyping on.

There's a big chunk of money they spend on S&M and G&A (saw a big jump QoQ and YoY).

The focus on Sales & Marketing (coupled with miniscule R&D) should cause you concern as an investor, since it tells you that this is a sales driven organization, not a product driven one (which is not good for long term success)>

Here's what they say about their S&M developments over the quarter:

"For the three months ended September 30, 2016, the Company had selling and marketing or S&M expenses of $2,145,000 compared to $1,835,000 for the three months ended September 30, 2015. S&M expenses increased primarily due to increases in media advertising expenses and in commercial sales related personnel costs. During the third quarter, the decision was made to shift the focus of the residential sales effort from media advertising and from staffing a call center to a direct sales approach. The call center was closed and new media advertising was significantly reduced. The larger portion of these cost reductions will not be experienced until the 4 th quarter. We have substantially increased the number of commercial and agricultural sales team members and their compensation. As a percentage of revenue, S&M expenses were 12% of third quarter revenues in 2016 compared to 9% in the third quarter of 2015. We have specially-designed marketing efforts and tracking systems in place that enable us to attract new customers at a lower cost and higher conversion rate than what we believe to be the industry average. This same tracking system also helps to identify which marketing efforts are productive and was a basis for determining that the residential direct sales marketing approach may be more cost effective."

I don't like how this sounds.

Here's how they explain G&A jump:

"Total general and administrative or G&A expenses increased to $4,250,000 for the three months ended September 30, 2016, compared to $1,744,000 for the three months ended September 30, 2015. Some of the increase in G&A expenses was due to the costs associated with acquisition of Elite Solar. Furthermore, there are additional costs associated with opening four new offices, additional personnel, vehicles, insurance and a variety of professional expenses driven by the significant organic growth realized by the Sunworks operations compared to the prior year. As a percentage of revenue, G&A expenses increased to 24% in the third quarter compared to 9% in the third quarter of 2015. Certain G&A expenses are fixed costs, over the short term which results in a the costs being a higher percentage of revenue when calculated based upon a lower revenue amount. "

Fair enough but the acquisitions are focused on sales teams, not product.

Anyhow, Sunworks seems to me like a logistics company with no product and a very heavy focus on sales in a highly competitive and government driven marketplace. This is really a long shot but should be interesting to monitor developments going forward.

Cemtrex is a complicated business...

Here's an interesting company that has been going bananas of late.  From their website:

"Cemtrex Inc. (Nasdaq: CETX) is a world leading diversified industrial and manufacturing company that provides a wide array of solutions to meet today's technology challenges. Cemtrex provides advanced custom engineered electronics, emission monitors & instruments for industrial processes, and environmental control & air filtration systems for industries & utilities."

They operate primarily in two segments: Electronic Manufacturing Services and Industrial Products and Services, 

Here is what they say about the business in their 10-K:

Electronics Manufacturing Services (EMS)

Cemtrex, through its Electronics Manufacturing Services (EMS) segment, provides end to end electronic manufacturing services, which includes product design and sustaining engineering services, printed circuit board assembly and production, cabling and wire harnessing, systems integration, comprehensive testing services and completely assembled electronic products.

Cemtrex’s EMS segment works with industry leading OEMs in their outsourcing of non-core manufacturing services by forming a long term relationship as an electronics manufacturing partner. We work in close relationships with our customers throughout the entire electronic life of a product, from design, manufacturing, and distribution. We seek to grow our business through the addition of new, high quality customers, the expansion of our share of business with existing customers, and participating in the growth of existing customers.

Using our manufacturing capabilities, we are able to provide our customers with advanced product assembly and system level integration combined with test services to meet the highest standards of quality. Through our agile manufacturing environment we can deliver low and medium volume and mix services to our clients. Additionally we design, develop, and manufacture various interconnects and cable assemblies that often are sold in conjunction with our PCBAs to enhance our value to our customers. The Company also provides engineering services from new product introductions and prototyping, related testing equipment, to product redesigns.

Our ability to attract and retain new customers comes from our ongoing commitment to understanding our customers’ business performance requirements and our expertise in meeting or exceeding these requirements and enhancing their competitive edge. We work closely with our customers from an operational and senior executive level in order to achieve a deep understanding of our customer’s goals, challenges, strategies, operations, and products to ultimately build a long lasting successful relationship.

Industrial Products & Services (IPS)

Cemtrex, through its Industrial Products and Services segment, offers single-source services for in plant equipment erection, relocation, and maintenance. The segment also sells a complete line of air filtration and environmental control products to a wide variety of industrial customers worldwide. The segment also manufactures, sells, and services monitoring instruments, software and systems for measurement of emissions of Greenhouse gases, hazardous gases, particulate and other regulated pollutants used in emissions trading globally as well as for industrial processes. The Company also markets monitoring and analysis equipment for gas and liquid measurement for various downstream oil & gas applications as well as various industrial process optimization applications.

The Company, under the Griffin Filters brand, provides a complete line of air filtration and environmental control equipment to industries such as: chemical, cement, steel, food, construction, mining, & petrochemical. This equipment is used to: (i) remove dust, corrosive fumes, mists, hydrocarbons, volatile organic compounds, submicron particles and particulate from industrial exhausts and boilers; (ii) clean noxious and acid gases such as sulfur dioxide, hydrogen chloride, hydrogen sulfide, chlorides, and organics from industrial exhaust stacks prior to discharging to the atmosphere; and (iii) control emissions of coal, dust, sawdust, phosphates, fly ash, cement, carbon black, soda ash, silica, etc. from construction facilities, mining operations and dryer exhausts.

The Company through its AIS subsidiary offers one-source expertise and services for in plant maintenance, equipment erection, relocation, and disassembly to diversified customers in USA. AIS installs high precision equipment in a wide variety of industrial markets like automotive, printing & graphics, industrial automation, packaging, and chemicals among others.

The Company, under the MIP-Cemtrex brand, manufactures and sells advanced instruments for emissions monitoring, process analysis, and controls for industrial applications and compliance with environmental regulations. MIP-Cemtrex emission monitoring systems are installed at the exhaust stacks of industrial facilities and are used to measure the outlet flue gas concentrations of a range of regulated air pollutants to determine the quality of the air we breathe. Through use of the company’s equipment and instrumentation, Cemtrex clients can monitor the exhausts to the atmosphere from their facilities and comply with Environmental Protection Agency and state and local emission regulations on dust, particulate, fumes, acid gases and other regulated pollutants into the atmosphere.

MIP’s Laser Opacity monitor is used to determine opacity or dust concentration in stack gases. Cemtrex also provides direct-extractive and dilution-extractive CEMS (continuous emissions monitoring solutions) equipment and systems for use with utilities, industrial boilers, FGD systems, SCR-NOx control, furnaces, gas turbines, process heaters, incinerators in industries such as: chemicals, pulp and paper, steel, power, coal and petrochemical along with municipalities, state and federal governments. The Company provides a single source responsibility for design, engineering, assembly, installation and maintenance of systems to its customers. The Company’s products are designed to operate so as to allow its users to determine their compliance with the latest governmental emissions regulations.

Cemtrex also markets a range of crude oil and natural gas analyzers. These products provide real time measurement of various properties specific to the refining processes of oil and gas. Some of the properties include RON, salt and water content, pH, viscosity, and other critical parameters that can be used to improve the blending and refining processes. The analyzers are sold by refineries and similar facilities to optimize the yield of blended and refined product.

Here are some observations / thoughts:
1) The AIS acquisition brought in $23MM of revenues and $2.4MM of EBITDA (from their press release). That's an EBITDA margin of 10.4%. This makes sense for a business that installs high precision equipment. They do mention cross selling opportunities with their IPS business, but note the gross margin on their IPS business is 30%+, which is remarkable given the AIS margin was way lower.
2) The only clue I got from why their GMs are so high is in the CEO letter. He says they focus on attractive niche segments of the EMS and IPS markets. Definitely sounds like he has a strategy, so kudos to management for doing that.
3) I believe Periscope GmbH went bankrupt, so they were able to purchase assets at an attractive price. How replicable is that as a long term strategy?
4) A lot of their sales are in Southeast Asia and accounts receivables has swollen.
There are also some red flags here. The Indian auditor is one. Also there is too much hyperbole from the CEO about the size of the EMS and IPS market.

Overall, I can't get a good enough grasp of the business to really get bullish or bearish. The narrative is an attractive one, but unless you can get a good idea of what the competitive advantage of their product is (and how they will be able to defend those sky high Gross Margins) and what the associated organic growth of their businesses might be, it seems like you're just buying into the management story.

My sense from reading their 10-K, last 10-K, acquisition history, balance sheet, income and cash flow statement is that this is really a hodgepodge of two different business lines with little cross synergies: EMS and IPS. I think they made some smart acquisitions in their EMS segment (Periscope GmBH) and IPS segment (AIS). So their results have improved.

I have no idea why they have such high gross margins in either segment. There's a vague explanation in the CEO letter and 10-K ("EMS offers...outsourcing of non-core manufacturing services") but really not enough to understand what their competitive advantage is, nor how they will be able to maintain their high gross margins, which are anomalous vs. peers.

Growing a business through acquisition is very difficult, so the odds are against them. Growing organically is also difficult since they need a product that is competitively advantaged. Both require capital as a reasonable cost. If this business is going to be successful, it will need to provide more clarity on where sales are coming from (by product line) and how they intend to expand their customer base. Since I have no clarity on any of these things (except for bold claims from the CEO about the size of their target markets), I don't feel confident in the company. Hopefully, this helps you too. All the best.

Xerox is cheap, but there isn't that much to get excited about ...

Xerox is now a pure play Document Technology company.  So you can now invest in a pure play low margin business in secular decline without the distractions associated with a potential low margin low quality consulting business they had previously developed in Conduent.

Here is what Xerox does.  They haven't updated the description since the separation, but ignore the Services bit:

"Xerox Corporation is engaged in imaging, business process, analytics, automation and user-centric insights. The Company's segments include Services, Document Technology and Other. The Company's Services segment comprises two types of service offerings: Business Process Outsourcing (BPO) and Document Outsourcing (DO). Its DO offers services, such as managed print services (MPS), which include workflow automation and centralized print services (CPS). Its BPO business includes services that support enterprises through multi-industry offerings, such as customer care, transaction processing, finance and accounting, and human resources, as well as industry-focused offerings in areas, such as healthcare, transportation, financial services, retail and telecommunications. Its Document Technology segment includes the sale of products and supplies, as well as the associated technical service and financing of those products. Its Other segment includes paper sales in its market countries."

Looking at the segment profit figures the company released (here: http://xerox.bz/2iBbQBG), first three quarters of operating profit for 2014,2015,2016 were $839MM, $715MM and $601MM, respectively. That's a vicious decline of 15% each year.

Apparently, they have multi-year contracts that provide for an annuity like stream of cash flows.  While I haven't looked into these contracts, my first question is, how would their profitability be suffering if they didn't have "multi-year" contracts.  With friends like these, who needs enemies.

There isn't a whole lot to get excited about here, besides the fact that Xerox trades at a pretty cheap valuation and has a high FCF yield. Their financials show in the region of $960MM of operating profit from the Document Technology segment at a 13% margin. This business is in secular decline.

JPM produced a typically bullish price target of $10, which strikes me as aggressive.  JPM calculate free cash flow of around $900MM at some point in the future (thanks to a bunch of cost savings initiatives etc.), so with the market cap at $7.2b, you have a FCF yield of 12.5%. JPM might be a little bullish here IMO. The business is a low margin hardware company in secular decline. The bullish thesis is that most of this revenue is annuity like, which is true, but this is a declining annuity.  The bulls also argue that the market is "missing" the fact that most of their debt is backed by receivables on equipment they have leased out.  Fair point, but I do not think the market is missing this given the trading volume in this name.  Those declines in profitability include leasing revenues, so you can't have your cake and eat it too IMO.

Now is the 12.5% FCF yield too high a rate for this "annuity" cash flow? Maybe, maybe not. So they will allocate this FCF towards share buybacks and M&A. So buy it for a decent but not spectacular return I think. 

Conduent is not a stellar business...

Xerox is spinning off Conduent Inc. - a business process services company.  Spinoffs can trade cheap because existing shareholders often dump the stock without regard to value because they don't want to hold the spin off.  So here's a quick look at Conduent.  There were some references to this being another Accenture and worth looking into.  So let's start with the business description:

"Conduent Incorporated is a business process services company. The Company provides business process services with expertise in transaction-intensive processing, analytics and automation. The Company is engaged in providing business and government services. The Company offers customers in various areas, which include health solutions, learning services, digital payments, legal and compliance solutions, human resources, finance and accounting, procurement solutions and digital transformation. The Company also serves customers in various areas, such as aerospace and defense, automotive services, banking, chemical, insurance, pharma and life sciences, retail and consumer products, transportation, travel and utilities, among others."

Not sure about Xerox, but Conduent's financials are awful. This is no Accenture folks.
Here are some gems from their investor presentation:

- Low margin business overall (less than 10% EBITDA margins)
- Adj. EBITDA has declined for three straight years ($872MM in 2013 to $639MM to 2015) and qtr over qtr too
- All their business segments had declining revenue!
- Debt/TTM Adj. EBITDA is 3X. 
- Debt is high yield and the interest cost is almost 8%! 
- $150MM annual interest expense will make things interesting if business keeps falling
- Healthcare segment almost certainly faces headwinds from the Trump presidency.  
- TTM Pre-tax income was negative. 

So now, how low is this puppy going to trade, that we can squeeze blood from a stone? Net debt stands at $1.785b. TTM EBITDA is at $630MM. By my calculations, there are 205MM shares of this garbage outstanding, so the market cap at $14.9 a pop is $3.05b. Since this puppy made no net income last year, EV/EBITDA stands at around 7.7X EBITDA. Not sure I like the business or the valuation here.

But it could become interesting if it gets cheap enough.  I think though that the low quality and high debt profile of the business won't make for high conviction trades.

Arconic not excessively cheap if you include retirement deficit

Arconic's 2017E EBITDA guidance is for $12.1b revenues and 15% EBITDA margins. So $1.82b EBITDA.   They are forecasting net debt at the end of 2017 will be $5.9b. Given the current market cap of $8.4b, including the $2.2b of non-controlling interest / preferreds, $1b of Alcoa stake, the EV comes close to $15.5b (end of 2017E).

(Note: Arconic's debt shown on their balance sheet of $10.3b includes their unfunded pension and OPEB liabilities. Their gross debt before the redemption of the 5.55% notes was $8.1b (as per their investor day presentation on 12/14/16). So their net debt is closer to $6.3b). 

Arconic has an unfunded pension and OPEB liabilities around $3.3b ($2.2b NPV based on the latest 10Q). 

So key conclusions:

So, this is cheap if you exclude the retirement obligations, since it is trading at only 8.5X EBITDA. You could argue it deserves a higher multiple (10X?) given the stable margins and low CAPEX spend (particularly relative to Alcoa).

But if you include the retirement obligations, then EV jumps to $17.7b, and the EV/EBITDA multiple goes to 10X.

Perhaps you could argue it deserves a higher multiple, but that requires a more thorough analysis of peers.

Analysts have figured out the pension expense / OPEB impact on EBITDA estimates. The company gave guidance for $1.82b EBITDA (15% margins) and $60MM of expense associated with pensions / OPEB (included in $300MM corporate spread). Hence, consensus EBITDA is at $1.755b ($1.82b - $0.06b).
So if you exclude the Alcoa stake, this is trading at slightly more than 10X EBITDA and 18.5X consensus earnings. It's not a bad business given the steady margin profile, low CAPEX spend and exposure to autos and aerospace. But it isn't excessively cheap based on consensus. Of course, the question is: do you disagree with consensus?