PCP Market Research & Analysis Report
Updated Feb 5, 2014

Growth and Balance Sheet

The company reported a net income of $433 million, or $2.96 diluted earnings per share for the third quarter of fiscal year 2014 ending December 29. That's up from a net income of $338 million, or $2.30 diluted earnings per share for the same quarter last year. Revenues for the third quarter of fiscal year 2014 were $2,357 million, up from $2,034 million for the same quarter last year. Investment Cast Products segment revenue was down by 0.7% to $609 million, but operating income increased to $218 million from $209 million for the same quarter last year. Forged products segment revenue was up by 23.2% to $1,026 million, primarily due to the addition of TIMET to the segment’s top line. Airframe products segment revenue increased by 22.8% to $722 million, primarily due to acquisitions but also due to a single digit organic growth. Gross income margin was 34.32% compared to 32.10% for the same quarter last year. The operating income margin for the quarter was 27.96% compared to 25.47% for the third quarter last year. What is notable for the quarter is that the company achieved record cash generation and record consolidated segment operating margins. Also the company complete the acquisition of Parmaswage during the quarter. PCP forecasted fourth quarter of fiscal year 2014 EPS are from $3.15 to $3.37, compared to $2.81 for the same quarter of fiscal year 2013. The company managed to increase its cash position as at December 29 to $337 million, from $280 million as at March 31. Also, the company decreased its total outstanding debt to $3,622 million from $3,807 million as at March 31. 

Valuation

PCP PE stands at 21.24 leveled with the industry average of 22.2, but above the stock market average represented by the S&P 500 average of 17.29. The company is currently trading above the maximum P/E ratio of 15x, and over the last five years, the company’s shares have traded in the range of 6.76x to 24.72x trailing 12-month earnings. PCP's current Price/Sales of 3.77 is above the average of its industry of 1.59. PCP’s head to head comparison to its main competitor shows that the company has the highest gross margin in comparison to its main peers, and one that is above the industry average. Moreover, the operating margin is without a comparable of the selected peers, and also much higher than the industry average. The company is the only one that is recorded positive quarterly revenue growth of all the selected peers, and it is leveled with the industry average 15% growth in revenues. PCP trades at nearly identical P/E ratio in comparison to the main peers, but at a much higher P/S ratio. PCP’s twelve trailing months EBITDA is $2.87 billion, higher than all of the selected peers achieved EBITDAs. The stock is currently trading below its intrinsic value of $283.19, this suggests that the stock is undervalued at these levels. The beta of 0.43 implies lower volatility of the stock with respect to the S&P 500. PCP has shown favorable earnings consistency over the last five years. Furthermore, company’s earnings have grown by 7.74% over the last five years. The current quarter earnings in comparison to the same quarter last year have increased by a 28.7%. PCP total Debt/Equity of 33.75 is above the required maximum, and it is also above the industry average of 16.3. PCP’s current price levels are below the maximum level, 9.87% below the 52 week high of $274.96, and the technical analysis give a negative view of the stock. The majority of the analyst ratings are buy and outperform. PCP has a twelve trailing month dividend yield of 0.1%.

About PCP

Precision Castparts Corp. (PCC) is a manufacturer of metal components and products, provides investment castings, forgings and fasteners/fastener systems for critical aerospace and industrial gas turbine (IGT) applications. It also provides aero-structures for the aerospace industry; investment castings and forgings for general industrial, armament, medical and other applications; nickel alloys in all standard mill forms from ingots and billets to plate, sheet, strip, tubing, bar and wire, as well as cobalt alloys, for the aerospace, chemical processing, oil and gas, pollution control and other industries; seamless pipe for coal-fired, industrial gas turbine, and nuclear power plants, as well as oil and gas applications; revert management solutions among others. In January 2014, Precision Castparts Corp acquired SOS Metals Inc, a provider of metal recycling services. In January 2014, the Company acquired Trans World Alloys Inc.

Competitor Comparison

Precision Castparts Corp. (NYSE: PCP) N.V.

Highlights

Precision Castparts Corp. manufactures metal components and products worldwide. The stock closed yesterday’s trading session at $247.82. In the past year, the stock has hit a 52-week low of $180.06 and 52-week high of $274.96. The intrinsic value of the stock is above the current price. PCP has a market cap of $35.86 billion and is part of the Industrial Goods sector.

·   Wide product portfolio

·   Strong market position

·   Strong R&D

·   Highly dependent on small number of key customers

PCP Intrinsic Value

Stock Valuation Model & Intrinsic Value Definitions

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. PCP's 52 week high is $274.96, current price is $247.82, is 9.87% below the 52 week high.

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. The company has a P/E ratio of 21.24 the average industry P/E ratio is 22.2 and is above the S&P 500 P/E ratio of 17.29.

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders. Insiders own 0.14% of PCP stock. Management's representation is not large enough. This does not satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model.

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

PCP is trading in the range of $244.05 - $274.96 in the past 30 days. The stock has been showing support around the level of $247 and resistance in the $274 range. The stock is trading below the 50-Day Moving Average but above the 200-Day Moving Average. The RSI(14) is 27.59. As can be seen from the graph on page 1, after the slow start of 2013, the stock gapped up in early May and set a 9 month bullish course. The stock hit its all-time high of $274.96 on January 21, but since then the stock has contracted back to the last gapping up level (yellow line). There is also bearish sign on the MACD indicator and also the 20-day SMA (red) line is about to cross down the 50-day SMA (green) line which is another bearish sign. Moreover, on a weekly chart after the long bullish trend there is a doji candle, further confirming the market indecision to where the stock should go. Our indicators give a Negative view of PCP.

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Investor’s sentiment for the stock.

The model assigns a value according to analyst’s recommendation for the stock. Analyst rating on Reuters.com are 10 Buy, 10 Outperform, and 3 Hold.

We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. PCP’s annual EPS for the last 5 years were 7.43, 6.49, 7.04, 8.41, and 9.72 this type of earnings action is favorable.

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry. PCP’s Total Debt/Equity of 33.75 is above the required maximum, and it is above the industry average of 16.3.

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. PCP’s EPS growth for this quarter relative to the same quarter a year earlier is 28.7%, above our target.

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. PCP’s annual earnings growth rate over the past five years is 7.74, below our target

¹Tradespoon Score and Outlook: This score conveys Tradespoon’s long-term outlook of 1 to 5 years for a particular stock. Tradespoon uses proprietary methods to rate its trading picks on a scale from 1 to 10, with a 10 being the most favorable expected risk and return outlook. To determine a stock’s rating, Tradespoon uses an advanced algorithm that factors in fundamental and technical analysis to determine a stock's expected risk and return.