Neutral on Precision Castparts - Analyst Blog

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We are retaining our Neutral recommendation on Precision Castparts Corporation ( PCP ). Increasing demand in the commercial aerospace market and increased sales in general industries helped results in the recently reported quarter. Revenues for the recently concluded quarter grew 14% year over year, although earnings were down by $0.09.

However, year over year earnings grew 19.1%. All three reporting segments also posted double digit revenue growth during the quarter. The company is positive about its performance for the fourth quarter and fiscal 2011 as well. However, competition and pricing pressures remain a concern for the company. 

Precision Castparts is one of the few manufacturers that can consistently produce the largest and most complex structural investment castings in quantities sufficient to meet customers' quality and delivery requirements. It is the leading supplier of structural and airfoil castings for jet aircraft and IGT engines, and has helped it expand into the structural airframe and armament markets.

The commercial aerospace market is a major customer for precision investment casting products. Thanks to the recent recovery in the commercial aerospace market, sales in both Investment Cast Products and Forged Products have increased double digits for the first half of fiscal 2011.

The trend in manufacturing of aircraft jet engines is expected to increase the revenue per engine for the company. As the design of new generation aircraft engines has emphasized increased thrust, higher fuel efficiency and reduction of noise and exhaust emissions; engine operating temperatures and pressures have increased.

These conditions require the use of engine parts made of alloys that are able to withstand extreme operating conditions and provide an optimum strength-to-weight ratio. Many of these alloys are particularly suited for use in investment castings. In addition, titanium, a metal with a lower melting temperature than stainless steel or superalloys, is used in all but the hottest parts of the engine because of its considerable weight savings.

Titanium is an exceptionally difficult metal to cast because of its reaction to other elements. However, the company has developed the advanced technology and manufacturing processes to cast large, complex investment castings in titanium alloys. Many new generation engines, which are expected to be built through the next decade and beyond, will make significantly greater use of Precision Castpart's products than the previous engine designs.

Precision Castparts' strategy for profitable growth includes the pursuit of further innovation for its existing investment casting technology. It has been expanding the application of its investment casting technology in the medical prosthesis, satellite launch vehicle and general industrial markets by manufacturing such products as artificial hips and knees, parts for satellite launch vehicles, and impellers for pumps and compressors.

In addition, it is manufacturing an increasing number of large titanium components for armament systems, including the BAE lightweight howitzer, which entered full-scale production in fiscal 2005.

However, the company uses a number of raw materials in its products, including metals such as cobalt, titanium, nickel, tantalum and molybdenum, which are found in only a few parts of the world and are available from a limited number of suppliers. The availability and costs of these metals may be influenced by private or government cartels, changes in world politics, unstable governments in exporting nations and inflation.

These metals are required for the alloys used or manufactured in its investment castings, forged products and fasteners segments. The ability of key metal suppliers to meet quality and delivery requirements can also impact its ability to meet commitments to customers.

Future shortages or price fluctuations in raw materials could result in decreased sales and margins, or otherwise adversely affect its business. The enactment of new or increased import duties on raw materials could also increase the costs of obtaining the raw materials and might adversely affect its business.

Further, Precision Castparts is subject to substantial competition in all of the markets it serves, and expects this competition to continue. As a result, it has made significant long-term price concessions to its customers in the aerospace and power generation markets from time to time, and it expects customer pressure for further long-term price concessions to continue. Maintenance of its market share will depend, in part, on its ability to sustain a cost structure that enables it to be cost-competitive.

Precision Castparts currently holds a Zacks Rank # 3 which implies a short-term 'Hold' rating on the stock.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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