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Saturday, 17 February 2007
Precision Castparts (PCP) "Weekend Trading Portfolio Analysis"

 

 

 

 

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decision based on information on this website.

I try to accomplish a lot of different objectives on this blog simultaneously.  Since 2003, I have been writing up stocks that I believe meet my criteria for investment, I have been discussing different ways of managing your portfolio, and have also shared with all of you readers my actual trading portfolio; letting you know what I own, when I buy shares, and when I sell them.  As part of this "transparency" I have been trying to review my actual trading portfolio going through a different position every two or three weeks going alphabetically through the list.  Currently, I am up to 15 positions (below my maximum of 25 and above my minimum of 6).  Three weeks ago I reviewed my Morningstar position and going alphabetically, I am up to my Precision Castparts (PCP) holding.

I currently own 100 shares of Precision Castparts (PCP) in my Trading Portfolio which were acquired on October 24, 2006, at a cost basis of $69.05/share.  PCP closed on February 16, 2007, at a price of $94.74, representing an unrealized gain of $25.69/share or 37.2%.

As is my practice, I sold a portion of my holding of PCP, 1/6th to be exact, or 20 shares of my original 120 shares at $89.65 (net) for a realized gain on these shares of $20.60 or 29.8%.  It is my strategy to sell 1/6th of holdings if they should appreciate to 30, 60, 90, 120, 180, 240, 300, 360, 450, etc. appreciation points.  I plan on selling another 1/6th of my holding or 16 shares if PCP should appreciate to a 60% gain level or 1.6 x $69.05 = $110.48.  On the downside, after a single sale at a gain, I plan on selling all remaining shares if the stock should decline back to break-even or $69.05.

Let's take another look at this company and see if it still deserves a spot on this blog!

What exactly does this company do?

According to the Yahoo "Profile" on Precision Castparts, the company

"...engages in the manufacture of metal components and products; and the provision of investment castings, forgings, and fasteners/fastener systems for critical aerospace and industrial gas turbine applications. It operates through four segments: Investment Cast Products, Forged Products, Fastener Products, and Industrial Products."

How did they do in the latest quarter?

On January 23rd quarter 2007 results.3, 2007, Precision Castparts reported 3rd quarter 2007 results.  Total sales for the quarter came in at $1.4 billion, growing 61.5% over the $857.3 million in sales the prior year.  Net income for the quarter came in at $158.3 million or $1.15/diluted share vs. net income of $93.7 million or $.69/diluted share the prior year. 

The company beat expectations of earnings of $.98/share and also beat revenue expectations of $1.3 billion. 

What about longer-term financial results?

Reviewing the Morningstar.com "5-Yr Restated" financials, we can see that after a dip in revenue from $2.19 billion in 2002 to $1.81 billion in 2003, the company resumed a sharp increase in revenue to $3.5 billion in 2006 and $4.3 billion in the trailing twelve months (TTM).

Earnings have indeed been erratic, climbing from $.41/share in 2002 to $1.17/share, only to drop the next two years to $(.01)/share in 2005.  Since then, the stock has turned sharply around reporting $2.58/share in earnings in 2006 and $3.39/share in the TTM.

The company has been paying a dividend of $.06/share from 2002 through 2005.  In 2006 the company raised the dividend to $.11/share and has paid $.12/share in the TTM.

The company has also increased the number of shares outstanding modestly from 103 million in 2002 to 133 million in 2006 and 136 million in the TTM.  This 30% increase in shares has been accompanied by a nearly 100% increase in revenue and a 500% increase in earnings.  This is a dilution that seems quite reasonable to me!

Free cash flow, while not completely steady, has been positive and growing with $87 million reported in 2004, $132 million in 2006 and $286 million in the TTM.  The balance sheet, as presented by Morningstar.com, appears solid with $108.7 million in cash and $1,781.9 million in other current assets.  This total of $1.89 billion of current assets, when compared to the $1.10 billion in current liabilities yields a current ratio of 1.72 which appears healthy to me.  In addition, the company has another $1.16 billion in long-term liabilities reported on Morningstar.

What about some valuation numbers?

Reviewing Yahoo "Key Statistics" on PCP, we can see that this is a large cap stock with a market capitalization of $12.99 billion.  The trailing p/e is a moderate 24.58, with a forward p/e (fye 02-Apr-08) more reasonable at 17.98.  Thus the PEG (5 yr expected) works out to an estimated 1.01.  Generally PEG ratios between 1.0 and 1.5 are reasonable to me from a GARP perspective. 

Checking the Fidelity.com eresearch website, we see that PCP comes in with a Price/Sales ratio (TTM) of 2.70, well ahead of the industry average of 1.37.  Fidelity also shows that the Return on Equity (ROE) (TTM) works out to 21.59%, ahead of its two main competitors per Fidelity: Alcoa (AA) with a ROE of 15.03% and Ladish (LDSH) which has an almost as good ROE of 20.36%.

Finishing up with Yahoo, we find that there are 137.12 million shares outstanding with 136.50 million that float.  As of 1/9/07, there were 2.75 million shares out short representing 2% of the float or 3.2 trading days of volume.  This short intererst is just a bit over my '3 day rule' for significance.

As noted above, the company pays a forward dividend of $.12/share yielding 0.1%.  The company last split its stock 9/9/05, when it had a 2:1 stock split.

What does the chart look like?

If we review the "Point & Figure" chart on Precision Castparts from StockCharts.com, we can see one of the strongest charts I have on the blog.  However, with the stock climbing almost vertically it does appear to be a bit overextended at least short-term. 


Summary: What do I think about this stock?

Well, first of all, I do own shares of PCP, so I am quite prejudiced :).  However, let's review a few of the things I wrote up above.  First of all the stock is continuing to move higher since I purchased shares.  The latest quarter was incredible!  They reported a HUGE increase in revenue and earnings, and beat expectations on both.  Longer-term, they have been growing revenue strongly the past few years.  Earnings have been a bit more erratic, but have increased very strongly the past couple of years.

The company pays a small dividend and has been recently increasing the payment.  The number of shares is relatively stable compared to the sharp revenue and earnings increase.

Free cash flow is strongly positive and the balance sheet appears solid.  Valuation appears reasonable with a moderate p/e and a PEG just over 1.0.  The Price/Sales ratio does appear steep, but the ROE is better than at least a couple of its largest competitors.  Finally the chart looks quite strong if not overextended.  The stock may well be due to a correction short-term, but I see nothing holding it back from future appreciation.  Much will of course depend on the next quarter's results.  Anyhow, this is a great stock that has done well for me!

Thanks so much for stopping by and visiting.  If you have any comments or questions, please feel free to leave them on the blog or email me at bobsadviceforstocks@lycos.com.  If you get a chance, please feel free to visit my Stock Picks Podcast Website.  Have a great weekend everyone!

Bob


Posted by bobsadviceforstocks at 11:51 PM CST | Post Comment | Permalink

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