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…