Tags: Precision | Castparts | recovery | PCP

Precision Castparts Reliant On Broad Recovery

By    |   Tuesday, 10 April 2012 11:22 AM

As a manufacturing company, Precision Castparts (PCP) is largely a play on continuing demand in aerospace, industrial, and energy development, all sectors heavily reliant on a broad, global recovery. Pricing an entry into this stock might be a matter of waiting for stocks in general to finish any correction still ahead.

Precision makes complex metal components and products for aerospace and industrial gas turbine applications, as well for customers in medicine, chemicals, oil and gas, nuclear power, coal, automotive, pulp and paper, power generation, and water treatment.

PCP's aerospace business in 2011 grew by 19 percent to $3.57 billion, close to recovering to the level seen in 2009. “Although fiscal 2011 brought a long-awaited recovery in commercial aerospace markets for our Investment Cast Products and Forged Products segments, we continued to face challenges in the power markets and in all markets for our Fastener Products segment,” management told investors.

Meanwhile, as the overall industrial gas turbine market “remained relatively flat in fiscal 2011, we continued to experience significant weakness in sales volumes and pricing for our Forged Products' seamless extruded pipe products,” they reported.

Precision Castparts is a $24.33 billion market cap company, a giant in an industry where the average market cap is $5.82 billion. Its trailing 12-month P/E ratio is 20.98 compared to 16.04 for its peers in the aerospace and defense sector.

The company reported a backlog of unfilled orders at the end of each of its last three fiscal years of $4.4 billion as of April 3, 2011, $3.9 billion as of March 28, 2010, and $5.4 billion as of March 29, 2009.

“The increase in backlog during fiscal 2011 reflects increases in customer demand, creating longer lead times as facilities are operating closer to capacity levels,” the company said.

The company offers a projected five-year price-to-earnings-growth (PEG) ratio of 1.41 vs. 0.97 for the sector. The project earnings per share growth in the coming year is 19.69 percent vs. 16.85 percent for the sector.

Mixed views

Analysts have mixed views on Precision Castparts, with Standard & Poor’s rating it outpeform and RBC Capital Markets, Citigroup, Stifel Nicolaus and Deutsche Bank all in the buy camp.

Columbine Capital and EVA Dimensions rate it a sell.

“We see six- to seven-year order backlogs at both Boeing and Airbus, as well as increased recent order rates, supporting production increases at both planemakers,” S&P analysts wrote recently. A recovery in the energy markets would increase demand for industrial gas turbine parts and seamless pipe, they wrote.

Precision Castparts next reports on May 14.

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