Thursday, May 8, 2014

PCP Beats on Q4 2014 Earnings

The Q4 2014 results are in for Precision Castparts (PCP) with earnings that topped estimates. Sales increased 4%, going from $2.4 billion last year to $2.53 billion this year. Operating income increased 15%, going from $626 million last year to $720 million this year. Operating margins expanded 280 basis points, going from 25.7% last year to 28.5% this year. All of these factors generated EPS growth of 16%--slower than previous quarters that generated 20% growth--going from $2.82 last year to $3.27 this year.  This $3.27 EPS beat consensus by 2 cents. The stock made little movement in the post-midday trading in response to the news.

Military sales, which make up 15% of PCP’s aerospace market, fell 22% in the quarter.  However, sales for the much-larger segment of commercial aircraft, which makes up 79% of PCP’s aerospace market, rose 5%. This is in line with our investment thesis that commercial aircraft sales should be the driver behind this company. Because fuel accounts for one-third of commercial airlines expenses, there has been a push by these customers to invest in more fuel efficient aircraft. PCP’s largest customers, Boeing and Airbus, will continue to ramp up production of their new fuel-efficient planes and airlines will continue to look to replace their aging fleets.

PCP has characteristically continued its trend of achieving synergies through acquisitions.  TIMET, the titanium maker PCP bought last year, was credited in the earnings call as being “rapidly integrated and delivering accelerated performance.”  The recent acquisition of ADI is expected to expand PCP’s Airbus position, chiefly exposure to the A350.  Going forward, there are some commodity risks the Group should keep its eyes on.  Rising nickel prices—which PCP combats with the use of scrap metal—and the growth in natural gas prices—which could hurt PCP’s IGT (a fancy name for jet engines that are used to generate power) aftermarket—should be kept on the radar. In addition, we need to monitor if slipping in military sales is a continued trend. The model and price target will be updated soon.

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