As Others Press, Precision Profits

4/13/2009


  Recent Price
$60
  Dividend
$0.12
  Yield

0.2%

  P/E Ratio
8
  Shares (millions)
140
  Long-Term Debt as % of Capital
5%
  52-Week Price Range
$131.38 - $47.08

When a rival’s 50,000-ton metal press went down, Precision Castparts ($60; PCP) offered the services of its own press, the only other machine in the U.S. designed to forge 6,000-pound titanium bulkheads for Lockheed Martin (74; LMT) fighter jets. Precision Castparts heads a short list of suppliers of large, complex metal parts used in such products as planes and turbines.

Precision, a market leader with a solid track record of growth, seems likely to outperform the market over the next two to three years. Consensus estimates expect Precision’s profits rose 7% to $7.42 per share in fiscal 2009 ended March and will climb another 6% in fiscal 2010. Precision is a Long-Term Buy.

Business mix
Precision operates three segments: Forged Products (44% of sales in the nine months ended December), Investment Cast Products (33%), and Fastener Products (23%). Investment casting involves pouring molten metal into ceramic molds to make components for aircraft engines, plane fuselages, gas turbines, and medical prosthetics. The forging unit makes components by heating nickel, titanium, or steel, then shaping the metal with presses. The two segments sell to many of the same customers.

Slightly more than half of company sales come from the aerospace market, while power generators provide about a quarter of sales, with general industrial and automotive firms accounting for the balance. Precision receives 12% of sales from General Electric ($11; GE) and at least 16% from Boeing ($37; BA). The company also books about $3.5 million in revenue for each Lockheed F-22 jet built.

Sales advanced 6% in the nine months ended December. Investment Cast Products sales rose 12%, while sales of Fastener Products jumped 13%. Forged Products sales fell less than 1%.

In the December quarter, sales dipped 3%, hurt by the Boeing strike and currency losses. Precision earned $1.74 per share excluding restructuring charges, up 1% but $0.06 above consensus estimates. Although growth has slowed in recent quarters, per-share profits have increased in every quarter since June 2004.

Precision’s long-term outlook appears solid. It holds contracts to supply components for new Airbus and Boeing planes. Exposure to these companies leaves Precision vulnerable to production delays. Still, a big lift should come late next year, when Boeing begins production on the 787 Dreamliner. Industrial gas turbines should support growth over the next year.

Acquisitions play a large role in Precision’s growth. In the December quarter, Precision purchased two companies for the fastener segment and a third for the forged-products unit. The deals should add about $200 million in annual revenue. Precision covered most or all of the $469 million purchase price with cash on hand. In the first nine months of fiscal 2009, operating cash flow increased 38%.

Conclusion
Precision enjoys leading market positions, a proven growth record, and robust balance sheet. Shares trade at eight times trailing earnings, 58% off the three-year average. An annual report for Precision Castparts Corp. is available at 4650 S.W. Macadam Avenue, Suite 440, Portland, OR 97239-4262; (503) 417-4800;
www.precast.com.

PRECISION CASTPARTS
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Dec '08 $1.74 vs. $1.72 - 3% $78.15 -

$47.08

10 - 6
Sep '08 1.89 vs. 1.67 + 7% 108.21 - 76.30 15 - 11
Jun '08 1.95 vs. 1.61 + 11% 131.38 - 96.30 19 - 14
Mar '08 1.89 vs.

1.44

+ 17% 142.94 - 92.66 22 - 14
           
Year
(Mar.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $6.85 $6.89 $0.12 $160.73
-
$92.66 23 - 13
2007 $5.36 $4.45 $0.12 105.80
-
49.40 24 - 11
2006 $3.55 $2.57 $0.12 60.66
-
36.10 24 - 14
2005 $2.92 $1.80 $0.06 39.88
-
20.68 22 - 11
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
98 80 84 97 95 53 60

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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