Constellium NV (CSTM): Why Wolf Hill Capital Loves This Aluminum Stock

Wolf Hill Capital is bullish on Constellium NV (NYSE:CSTM), a Netherlands-based developer of aluminum products. Constellium had a solid year in 2017, with the company’s share price surging more than 70%. The aluminum industry has struggled lately due low prices aimed weak demand. However, the metal industry is getting ready for better days in 2018, thanks to a growing demand from the aerospace and automotive sectors. Wolf Hill is confident about the aluminum industry in 2018, and in its Q4 investor letter, the fund talked about Constellium as well as other companies. In this article, our focus is on Wolf Hill’s investment thesis about Constellium.

Here are Wolf Hill’s comments about the aluminum stock:

In recent quarterly letters, we discussed in detail our thesis behind our largest position, Constellium, and why we thought this aluminum fabricator offered the potential for a 4-5x potential return. As this remains our largest position due to price appreciation, a quick update is in order. During the quarter, CSTM partially recapitalized its balance sheet by simultaneously issuing 25 million shares of stock and issuing a new unsecured bond. The proceeds from these capital markets transactions were used to retire several issues of outstanding bonds and to strengthen the company’s balance sheet. While these transactions served to partially de-risk the company’s levered balance sheet, they came at a steep cost in terms of shareholder dilution. The net result is that the secondary stock sale took the wind out of the sails of those looking for a quick sale to a strategic buyer.

That said, the de-leveraging impact of the recapitalization along with continued solid operational execution and secular tailwinds in CSTM’s key end-market should provide the foundation for the next leg of CSTM’s resurgence. In fact, as we put the finishing touches on this letter, Bloomberg News is reporting that Mumbai-listed Hindalco is close to announcing a transaction to acquire privately held CSTM competitor, Aleris Corp. for $2.5b. This would represent 12.1X LTM EBITDA multiple for Aleris, a rich valuation that highlights the scarcity value and desirability of domestic aluminum fabrication assets. Applying the same multiple to CSTM would result in a $30+ stock price, 3x where it is currently trading. Just saying…



Constellium NV (NYSE:CSTM) is a $1.80-billion market cap maker of aluminum products for a range of markets and applications, including aerospace, automotive and packaging. Shares of the company are up 20.18% since the beginning of the year, while the value of the stock has moved up whopping 78.67% over the past 12 months. The stock, currently trading at $13 per share, has a consensus average target price of $14.17 and a consensus average recommendation of OVERWEIGHT, according to analysts polled by FactSet.

Constellium reported a solid performance for its third quarter, with revenue increasing 7% year-over-year to €1.3 billion mainly due to higher aluminum prices. The company posted net income of €21 million for the third quarter, up compared to €15 million in the same quarter of 2016. Its adjusted EBITDA was €111 million, up 15% year-over-year due to improved results from the aerospace and transportation and the automotive structures and Industry business units.

Further, Constellium updated its guidance for adjusted EBITDA growth in 2017 to around 13%. It expects adjusted EBITDA growth in the high single digits annually for the next three years, leading to more than €500 million of adjusted EBITDA in 2020. The company is set to report its fourth-quarter financial results on February 22.

Meanwhile, Constellium NV (NYSE:CSTM) isn’t very popular stock among hedge funds tracked by Insider Monkey. There were 36 funds in our database that see a value in the aluminum products developer, including North Run Capital, Bronson Point Partners, and SkyTop Capital Management.

Disclosure: none