Industrial economies require lots of mixing, bending and
shaping of metals. That's the expertise of Precision Castparts (
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 (
), Rolls-Royce and Pratt & Whitney, a unit ofUnited
). These are the engine builders for Airbus andBoeing (
), 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,
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
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
Precision faces a wide array of competitors across its
business lines. These notably include units ofAlcoa (
) andAllegheny Technologies (ATI).
"It's a very competitive market," noted Morningstar analyst
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
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
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
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,"
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
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
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."