Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

All right, Elliott, let's see what you can do.

Arconic Inc., the metal-parts maker that Elliott Management Corp. tangled with in a particularly hostile proxy fight earlier this year, announced on Monday that it had finally hired a new CEO. Chip Blankenship, a General Electric Co. veteran, will take the job.

Elliott "strongly" approves, but shares of Arconic fell as much as 10 percent. That in part has to do with the disappointing third-quarter earnings it announced concurrently. But I also wonder whether it's not a great time to have GE in your headlines. The industrial giant's cash crunch and colossal earnings miss have undermined its status as a standard of operational excellence. Not to mention expertise from inside a conglomerate may not be the "get" it once was amid the industrial sector's breakup fever. 

Two Disappointments
Both Arconic and GE missed analysts' estimates for third-quarter adjusted EPS. The latter's woes may be affecting the former's stock after it hired a GE veteran.
Source: Bloomberg

It's worth noting that Blankenship spent much of his career at GE's jet-engine business, one of the parts of the company that's doing well right now. So investors should give him the benefit of the doubt. But beyond the GE overhang, his appointment puts a spotlight on the fact that it's now been six months since former Arconic CEO Klaus Kleinfeld was ousted and five months since Elliott secured a settlement that gave it three board seats and a hand in reviewing CEO candidates. And there's not a lot to show for all that upheaval yet. 

A goal to cut $100 million in overhead costs this year and a special investor meeting scheduled for next month to approve Arconic's reincorporation to the more shareholder-friendly state of Delaware have Elliott's fingerprints on them. At the end of last week, the stock was up a respectable 20 percent since news of Elliott's proxy fight broke in January. But after Monday's drop, it's now tracking below the S&P 500's gain of about 12 percent during the same stretch.

Show Me
Arconic shares are up since Elliott launched its proxy fight. But profit hurdles loom and cost cuts may not be enough.
Source: Bloomberg

The earnings shortfall can be blamed in large part on an accounting-related charge and the impact of higher raw material costs. Arconic expects those factors to do damage to its fourth-quarter numbers as well, although it maintained its full-year EPS guidance. Also concerning were the higher-than-expected costs associated with ramping up production of components for new jet-engine models.

Higher material costs aren't unique to Arconic. They're a big watch item for all industrial companies as analysts wait to see if companies are able to raise prices enough to offset the impact amid a recovery in spending. And it's also not the only company grappling with higher engine rollout costs (ahem, United Technologies Corp.) But these challenges also weren't completely unforseen.

Meanwhile, Boeing Co. and Airbus SE are pressuring suppliers like Arconic to cut their prices at the same time customers like GE and United Technologies are looking to eventually in-source a lot of their components manufacturing with 3D printing.

Work in Progress
Analysts increased their estimates for Arconic's EPS after Elliott launched a proxy fight. But optimism for improvement has flat-lined of late.
Source: Bloomberg

It's still early days. The uncertainty over the CEO decision hasn't helped things. But the onus is on Elliott and its approved management to prove they do in fact have better ideas for handling these hurdles than the old team and to deliver the value creation that was promised in the proxy fight. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net