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PCP (NYSE) Aerospace & Defense Lead Analyst: David Motemaden Associate Analyst: Jimmy Regan Jon Benzimra Dan Brein Steve Jackson Roger Stewart. Precision Castparts Corp. Team Recommendation: Buy. Our one year target price is: $122.81 Appropriate purchase price (rationale): < $98
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PCP (NYSE) Aerospace & Defense Lead Analyst: David Motemaden Associate Analyst: Jimmy Regan Jon Benzimra Dan Brein Steve Jackson Roger Stewart Precision Castparts Corp.
Team Recommendation: Buy • Our one year target price is: $122.81 • Appropriate purchase price (rationale): < $98 • Top 3 reasons to purchase • Exposure to aerospace industry with minimal risk • Operating Efficiency • Strong Fundamentals
Company Description Precision Castparts Corporation manufactures metal products and parts for aerospace, automotive, and general industries. Precision Castparts operates in three main segments: Investment Cast Products, Forged Products, and Fastener Products. Precision Castparts was founded in 1949, and operates mainly in the United States (based in Portland, Oregon) and in the United Kingdom.
Business Units/Segments Precision Castparts Corporation is a collection of three major segments: Investment Cast Products The Investment Cast Products segment produces the world's largest diameter stainless steel, nickel-based superalloy, and titanium components; stationary vanes and rotating blades for high-performance turbine engines; small steel and titanium parts; and aluminum castings for aerospace and other applications. Forged Products The Forged Products segment includes Wyman-Gordon Forgings’ titanium, nickel-based, and steel alloy components for aerospace, industrial gas turbines, and general industrial markets, as well as extruded, seamless pipe for energy markets, and Special Metals Corporation, offering the largest range of nickel alloys and product forms to aerospace and other industries Fastener Products The Fastener Products segment manufactures high quality specialty fasteners, assemblies and precision components for critical applications worldwide. The segment supplies technically sophisticated components and materials vital to key end user markets such as aerospace, transportation, power generation, racing, farm and construction equipment, and industrial machinery.
Company Strategy Overall, Precision Castparts focuses itself on discovering opportunities for top-and-bottom line growth. Their strategy centers on: Preeminent leadership in the market it serves A high degree of proprietary technology and technical expertise in its product lines Outstanding management of its complex manufacturing processes Close attention to the creation of shareholder value
Exposure to Aerospace with Minimal Risk • Precision Castparts is a “safe haven” play on an otherwise uncertain sub-industry • Solid management with superior track record in a down cycle • 2001: ROIC of 23.62% , ROE of 14.91% • Financial security to capitalize on market turmoil • Aerospace Industry Outlook is Two-Faced • Pros: • High level of aircraft orders & backlogs • Planned deliveries stretching out to 2014 for some models • Expanding aircraft fleet sizes in developing regions • Cons: • Expected slow in domestic orders during 2008 • High oil prices
Exposure to Aerospace with Minimal Risk • Aerospace & Defense companies risks include: • International competition • Crippled defense budget growth • Precision Castparts offers hedged benefits • Aging air force fleet requires repairs • Maintenance, repair and overhaul (MRO) industry has seen noticeable benefits from a rise in air travel • Expected aerospace fastener gains • Boeing’s 787 is PCP’s highest content program • Supply components on a “build-to-print” basis • Not a tier one supplier, doesn’t face ongoing R&D expenses or payment delays • Shipments should ramp in 2009 2012 based on conservative estimates
End Market Exposure • Fastener Products • Sales expected to grow from increased sales volume, market share gains, and extended content from qualification of new fastener part families within the aerospace market • Segment will also benefit from a full year of operations from Cherry (acquired 2003) • Investment Cast Products • Sales expected to continue to benefit from increased demand from commercial aerospace customers and renewed strength in the power generation market • Segment is in the process of expanding manufacturing capacity over the next 12 months • Forged Products • Future sales growth expected to moderate as SMC increases the quantity of alloys it provides internally to the Company’s forging operations • Segment will benefit from… • McWilliams and Caledonian acquisitions • Continuing strength in the commercial aerospace and power generation markets • SMC’s market share gains in non-aerospace markets.
Operating Efficiency • Margin growth expected to continue • Continuing productivity gains • High-value capacity increases • Isothermal, Single Crystal Blades, IGT • Significant market share in most of its markets gives PCP pricing power over its products • Internal nickel buys via SMC (from 35% of total to 80% over time)
Operating Efficiency Acquisition Strategy • Complement strong organic growth with a disciplined acquisition strategy • Strong track record of improving performance of acquired companies • Wyman Gordon, SPS, SMC most recent successful integrations • Many believe there will be another acquisition in 6-12 months
Strong Fundamentals • Margins • EBITDA margins at least 380bps higher than closest competitor • Profit Margins are best among competitors and are expected to grow • Returns • ROA, ROE, ROIC • Free Cash Flow • Low Debt (D/E < 0.20) • CAGRs
Competitive Landscape Spirit Air Systems (Market Cap $3.04B) World's largest independent supplier of large component parts and assemblies for commercial aircraft. Also operates in military and general aviation. Hexcel (Market Cap: $1.82B ) Develops, manufactures, and markets advanced composites for use in the commercial aerospace, space and defense, and industrial applications. Goodrich (Market Cap: $7.38B ) Supplies components, systems, and services to the commercial and general aviation airplane markets, as well as to the defense and space markets worldwide. Alcoa (Market Cap: $30.21B) Manages the technology, mining, refining, smelting, fabricating, and recycling of aluminum and resulting finished products
Threats/Concerns Potential slowdown in aerospace industry Possible failures to integrate new acquisitions Volatility in material prices
Current Events March 18, 2008: Precision Castparts CEO Mark Donegan presented an overview of business operations at the JPMorgan Aviation & Transportation Conference February 22, 2008: CEO Mark Donegan sold 18,000 shares of common stock at $115.52 a share. January 22, 2008: Precision Castparts announces that their 2008 third quarter profit jumped by 55% percent as a result of improved operating efficiency across all major business segments
Team Recommendation: Buy Our one year target price is: $122.81 Appropriate purchase price (rationale): < $98 Top 3 reasons to purchase Exposure to aerospace industry with minimal risk Operating Efficiency Strong Fundamentals
