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.
PRECISION CASTP (
PCP
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