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From the Survey: Precision Castparts
Precision Castparts (PCP) is an Oregon-based manufacturer of complex metal components and products used in the aerospace and industrial markets. The company has come a long way since its humble beginnings as a spinoff of Joseph Cox’s Oregon Saw Chain outfit back in 1953. Then, a small structural castings business, chief executive Ed Cooley helped to propel Precision Castparts to the forefront of the specialized metal fabrication industry. By the time Bill McCormick took the helm in 1991, Precision had begun an expansion strategy of accretive acquisitions that eventually became a calling card. Indeed, the company is noted for its aversion to wasteful spending and emphasis on operational efficiency. Now, under Mark Donegan’s stewardship, with a market cap of over $24 billion and 2011 sales that are likely to be north of $7 billion, Precision Castparts is among the leading U.S. suppliers of industrial metal components to the aerospace and power generation sectors.
The company operates through three primary segments: Forged Products (about 45% of total 2010 sales), Investment Cast Products (about 33%), and Fastener Products (about 22%). Boeing (BA - Free Boeing Stock Report), General Electric (GE - Free General Electric Stock Report), and United Technologies (UTC - Free United Technologies Stock Report) are among some of Precision’s major domestic customers, along with foreign-based giants like Rolls Royce and Airbus, the subsidiary of the aerospace consortium EADS. The aforementioned products are mainly distributed for use in jet aircraft engines and industrial gas turbines. Given the specialized complexity and quality of Precision’s castings, it has established long-standing relationships with its customers, which make it a formidable force for its competitors.
The company’s major domestic competitors include Alcoa (AA - Free Alcoa Stock Report), Allegheny Technologies (ATI), Carpenter Technology (CRS), and Haynes International (HAYN). Although the stock is considerably more expensive than its counterparts at $171 a share, the P/E multiple is slightly below those of its peers. Notably, PCP is the only equity of the five to surpass its pre-recession (2007-2009) peak. Moreover, the consistency of its historical earnings and cash flows, coupled with the predictability of its potential growth prospects going forward, all of which outmatch those of the competition, offer some insight into what has been driving the stock price over the past several years. In addition, Precision’s balance sheet is much healthier than most of its rivals in this group.
Looking ahead, the likelihood of a sustainable up-cycle in the metal fabrication industry suggests that Precision will continue to generate solid top- and bottom-line gains over the long haul, as economic indicators point toward a protracted period of metal commodity inflation once the global economy stabilizes. In particular, the strong demand in the aerospace sector should prove lasting. Indeed, competition in that industry grows fierce as manufacturers scramble to adapt to an increasingly challenging environment, in which efficiency is the order of the day, and there is a growing need to build new aircraft, as well as update existing fleets. These prospects alone should propel Precision Castparts’ performance over the next 3 to 5 years. For a more detailed look at the company’s prospects and the stock’s merits, subscribers are encouraged to view our full-page report.
At the time that this article was written, the author had no positions in any of the companies mentioned.