PCP 2014 Q3 Earnings

Precision Castparts (PCP) posted their Q3 2014 earnings data for fiscal year 2014 as scheduled on Thursday, January 3^rd, 2014.  A reported quarterly EPS of $2.95, which missed the consensus estimate of $3.04 by $0.09, was a disappointing end to a quarter where we saw steady gains in the stock.  Between this disappointing earnings report and a plunge in the market PCP has been beaten hard the last two days with a fall in share price of -5.63%.  PCP closed the week with a price of $255.46.  Just to get some perspective of a lower cap, we bought into the stock at $243.14.  Although the picture for PCP might look bleak, I believe that the fall in share price and miss on earnings should not be impetus for us to sell out but rather an opportunity to buy into a great company at a depressed price.  I hope to make a case for why I believe this to be true.

When combing through the Q3 earnings call transcript it became clear that the miss on the EPS was not attributable to any fundamental fault in management or business plan but rather late quarter dynamics that frankly PCP could not have easily controlled or mitigated.  This led to a delay in sales and adversely affected the top line.  So in a sense, I believe the market has overreacted to PCP’s Q3 report because what ate into the EPS for the quarter does not seem to be an event that could reoccur.

PCP’s fundamentals are solid and everything that we set forward as an investment thesis is intact.  PCP is the market leader in a rapidly growing OEM market and shareholders will be rewarded.  PCP has demonstrated that they can perform: sales increased 16% versus last year, operating income increased 27% versus last year, operating margins expanded 250 basis points, going from 25.5% last year to 28% this year and EPS increased 28%.  Looking ahead, a projected step-up in customer contracts typical for Q4 will be the impetus for more growth going forward.  Our updated price target is $283.18.
PCP took a sucker punch this quarter but I do not think this should be used as a basis to sell out.  Since we took a half position in PCP, I would encourage the group to consider doubling down and look at the current price as not as a poor signal but as a good opportunity.