On Jan 3, we reiterated our Neutral recommendation on
Precision Castparts Corp.
) largely due to modest second quarter fiscal 2014 results. We
prefer to remain on the sidelines until we see substantial
organic growth and improvement in the overall industry
Why a Neutral Recommendation?
On Oct 24, Precision Castparts reported second-quarter 2014
earnings from continuing operations at $2.90 per share, which
beat the Zacks Consensus Estimate of $2.82 by 2.8%. Quarterly
earnings were up 27.7% year over year from $2.27 in the
prior-year quarter. Despite a sluggish economy, underlying growth
across the company's markets and segments remained strong during
Precision Castparts' revenues increased 22.6% year over year
to $2,362 million from $1,927 million in the prior-year quarter,
primarily driven by organic growth of 6%. However, revenues were
short of Zacks Consensus Estimate of $2,365 million.
The improved results in the recently reported quarter came on
the back of increased demand in the commercial aerospace as well
as strong oil and gas businesses. Two of the three reporting
segments posted double-digit revenue growth during the quarter.
Furthermore, IGT (Industrial Gas Turbine) is also showing good
momentum in its aftermarket backlog as the company will be
shipping out large quantities of nickel-based, severe service
tubular product in the upcoming four quarters. The company
expects its major end markets to drive organic growth.
However, the highly seasonal nature of aerospace and power
generation markets might prove to be a headwind for Precision
Castparts' business. The demand for commercial aircraft is also
being negatively influenced by effects of terrorism, changing
global political environment, and U.S. foreign policy. The power
generation market is also facing challenges from rising fuel
costs, and changing government policies regarding environment
control measures imposed on the power generation industry.
Precision Castparts is also focusing on expanding its product
lines and markets by pursuing strategic acquisitions. The company
completed twelve acquisitions in fiscal 2013, the most recent
being that of Permaswage SAS for $600 million in an all cash
transaction. These acquisitions contributed approximately $400
million to sales in fiscal 2013. The acquired companies are also
expected to benefit Precision Castparts going forward, with
improved sales and stronger global market position based on
diversity of its operations.
However, the company's weak cash and balance sheet position
might not facilitate sufficient flexibility to make innovative
investments and strategic acquisitions. In the last reported
quarter, its cash and cash equivalents dipped about 3.9% compared
to the last year's figures. Thus, we prefer to remain on the
sidelines until there is better visibility.
Other Stocks to Consider
Precision Castparts currently holds a Zacks Rank #2 (Buy).
Some better-ranked stocks in the sector include
Companhia Siderurgica Nacional
). Companhia Siderurgica Nacional
and ArcelorMittal both carry a Zacks Rank #1 (Strong Buy), while
Worthington Industries carries a Zacks Rank #2 (Buy).
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