Precision Castparts (PCP) has grown from a small manufacturer of investment castings for a wide variety of applications to a global market leader producing investment castings, forgings and fasteners for aerospace, power and general industrial markets.
In fiscal 2014, aerospace markets accounted for 68% of sales, power markets represented 18% of sales and general industrial and other markets accounted for 14% of sales. On a business segment basis as of 9/30/14, forged products accounted for 43% of sales, airframe products represented 32% of sales and investment cast products accounted for 25% of sales.
Because of the complexity of the manufacturing process and the application of proprietary technologies, Precision Castparts is one of the few manufacturers that can consistently produce large, complex structural investment castings in quantities sufficient to meet customers’ quality and delivery requirements. This has enabled the firm to become the preferred and leading supplier of structural and airfoil casting for jetcraft and industrial gas turbine engines and to expand into the structural airframe and armament markets.
Precision Castparts has been supplying castings for jet engines to GE, Pratt & Whitney and Rolls-Royce for several decades. Boeing and Airbus are also important customers.
Many new generation engines, which are expected to be built through the next decade and beyond, make significantly greater use of Precision Castpart’s products than did previous engine designs. Approximately 30% of the company’s sales of airfoil castings used in aircraft turbine engines are replacement parts.
Precision Castparts generates strong cash flows with free cash flow having soared fivefold from less than $300 million a decade ago to more than $1.5 billion today. With a minimal dividend, the company’s primary use of the growing cash flows has been for acquisitions.
With a focus on aerospace and power markets, acquisition candidates are selected which complement the company’s core capabilities. Management has been disciplined in their value-creating acquisition strategy with acquisitions immediately accretive to earnings. Management continues to focus on strategic acquisitions and expects to deploy $4-$6 billion to merger and acquisition activity between now and 2017.
In addition, with a solid balance sheet, PCP recently expanded its share buyback program by $1 billion, reflecting management’s confidence for future strong growth in cash flows.
Over the past five years, Precision Castparts has generated double-digit growth with sales and net income compounding at 15.3% and 17.5% annual rates. Through the first half of fiscal 2015, double-digit growth continued as net income rose 13% to $952 million with EPS up 14% to $6.56, demonstrating solid leverage of the company’s strong market share position in its primary end markets.
Going forward, end markets remain strong, especially as aging aircraft is replaced in developed markets while solid demand continues for new commercial jets in emerging markets.
This supports management’s outlook for continued double-digit EPS growth and strong cash generation in fiscal 2016 and beyond as the company expands content and leverages aerospace production rates while maintaining a relentless cost focus as it gains market share through vertical integration.
Investors should consider taking a long-term flight with Precision Castparts, a high-quality company, which is a profitable market leader that is generating strong cash flows and double-digit growth. Buy.
Ingrid R. Hendershot, Hendershot Investments, www.hendershotinvestments.com, 703-361-6130, December 2014
