Precision Castparts Proves Mettle In Planes And Power


Industrial economies require lots of mixing, bending and shaping of metals. That's the expertise of Precision Castparts ( PCP ).

With its nickel, titanium and steel alloys shaped to make critical components for aircraft, industrial gas turbines and energy sector equipment, Precision Castparts is now sharing in the success of its behemoth customers.

Most rewarding is the current cycle of commercial aircraft construction. Precision Castparts makes components for major aircraft engine makersGeneral Electric ( GE ), Rolls-Royce and Pratt & Whitney, a unit ofUnited Technologies ( UTX ). These are the engine builders for Airbus andBoeing ( BA ), both sitting on huge order backlogs as they develop and ramp up major new platforms.

$11 Million In Parts Per Plane

After some early problems and delays, Boeing is hiking production of its wide-body 787 Dreamliner. Every 787 has $10.5 million to $11 million worth of Precision Castparts components, estimates KeyBanc analyst Michael Ciarmoli. Boeing will be rolling out 10 new 787s a month by the end of the year, up from the recent rate of seven.

And when Airbus rolls out its new A350, Precision Castparts will contribute roughly $3 million in component value per plane, Ciarmoli says.

Precision Castparts benefits from order backlogs that dictate production of new models. But it is also gaining market share as it increases its engine and airframe presence on new versions of older aircraft.

Precision has been contributing just over $1.5 million in value on the current version of the narrow-body Boeing 737, while on the new, re-engineered version it will contribute nearly $2 million, according to Ciarmoli. Similarly, he expects Precision to grow its presence on the new version of the Airbus A320.

In addition to engine components, Precision is a major supplier of fasteners, which Sterne Agee analyst Peter Arment describes as "exotic screws." Made from nickel, titanium, aluminum and steel alloys, they function in engines, airframes, wheels, brakes and landing gear. As with other aircraft components, Precision looks to create metal alloys that cut weight while meeting exacting temperature and reliability demands.

Precision faces a wide array of competitors across its business lines. These notably include units ofAlcoa ( AA ) andAllegheny Technologies (ATI).

"It's a very competitive market," noted Morningstar analyst Neal Dihora.

But as an incumbent on so many engine and airframe designs, Precision has an advantage over new challengers. "Since it takes so long to get qualified on platforms, once you get qualified the customer is loath to switch," Dihora said.

The combination of incumbency and market-share gains during an upswing of the cyclical commercial aerospace business is a potent formula.

In its fiscal second quarter of 2014, reported in late October, Precision Castparts announced revenue of $2.36 billion, up 23% from a year earlier. Earnings per share grew 28% from a year ago to $2.90.

The company's EPS growth has accelerated for four quarters and achieved double-digit percentages for the last 13.

Precision is the third-largest company by market capitalization in IBD's Aerospace & Defense industry group, after Boeing andLockheed Martin (LMT). The group is ranked No. 28 in performance of the 197 that IBD tracks.

Much of the revenue and earnings growth in the second quarter reflects new contributions from recent acquisitions. CEO Mark Donegan told analysts on Oct. 24 that organic growth was roughly 6%.

That growth should accelerate, some analysts contend.

"We expect the aerospace cycle to continue to ramp until at least 2017," said Sterne Agee's Arment. "That visibility, plus the ability to grow market share, will enable annual double-digit bottom line growth over the next four years."

Analyst consensus calls for 23% EPS growth in 2014, up from the 16% gain logged in 2013.

Apart from aerospace -- which represents roughly two-thirds of sales -- Precision serves a couple of markets that could provide added kickers.

One promising sector is in piping used in newer forms of oil and gas exploration.

"Because the drillers are going deeper and pulling out more corrosive material, the carbon-based pipe infrastructure is vulnerable," Arment said.

Precision's piping, based on advanced alloys of nickel and titanium, "can handle the high pressure and corrosion better than the traditional pipes."

Precision also sells castings to industrial gas turbine makers, notably GE andSiemens (SI).

Demand for these turbines, used in electricity generation, has been largely flat. Electric utilities have not been rushing of late to build new generating plants.

"New plant construction in the U.S. hasn't been that robust," Dihora said.

'Higher Utilization'

Slowed growth in energy consumption, along with increased utility efficiencies, have reduced the need for new plants. Instead, utilities have run existing turbine-based generating facilities at "higher utilization rates," Arment noted.

This has generated demand for the sort of spare parts that Precision sells. Eventually, though, demand for new facilities could start growing again, which would stand to revive turbine sales for Precision.

Not surprisingly for a giant processor of exotic metals, Precision has environmental issues. The company has been named a Potentially Responsible Party (PRP) at a variety of locations, including six Superfund sites. As of March 31, the company had accrued $294.4 million in reserves to protect against environmental liabilities.

In August, the Toxic 100 study by the Political Economy Research Institute of the University of Massachusetts, Amherst, named Precision Castparts the leading U.S. air polluter among large corporations. In response, Precision issued a press release that disputed the UMass-Amherst study for assigning "false high toxicity levels" to metals emissions from Precision facilities. The study also failed to "reflect the commitment of Precision Castparts to environmental compliance," according to the release.

But even Precision acknowledges ongoing environmental risk. In its most recent annual report, Precision allows that it is "likely that we will be required to make additional expenditures, which could be significant, relating to environmental matters on an ongoing basis."

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.

This article appears in: Investing , Investing Ideas

Referenced Stocks: AA , BA , GE , PCP , UTX

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