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I was looking through the list of top % gainers on the NYSE tonight, and came across Precision Castparts (PCP) which closed at $59.89, up $2.48 or 4.32% on the day in an otherwise anemic market. I do not own any shares of PCP nor do I own any options on this company.
This review tonight is more or less a "revisit" of an old stock pick that was brought to my attention by George K., a good friend of mine, and a member of my stock club who suggested I take a look at PCP. In fact, I reviewed PCP on Stock Picks Bob's Advice on February 19, 2006, when it was trading at $56.37. Since the post, the stock has appreciated $3.52 or 6.2%. I hope that George picked up a few shares of this one at the time of his email and my discussion. If I find out, I will try to pass it on to you.
Let's take another look at this company and I will try to show you why I now fully agree with George that this stock deserves a spot on this blog!
1. 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."
2. Was there any news today to explain the stock move higher?
Looking through the news today, I found a single story from Motley Fool listing Precision Casparts (PCP) as one of the "Best Stocks of the Millennium. And what they are discussing is the appreciation of stocks since the end of 1999, December 31, 1999 to be exact. PCP was one of six stocks discussed, having appreciated 770% since that date! (The other stocks were Middleby, National Healthcare, Itron, and ITT). Was this the story that drove the stock higher? Probably not, but that was the only news item on the stock that I could locate!
3. How did the company do in the latest reported quarter?
On July 25, 2006, Precision Castparts (PCP) reported results for the 1st quarter of fiscal 2007. For the quarter ended July 2, 2006, sales increased 31.6% from $853 million in sales to $1.12 billion. Net income for the quarter increased from $77.9 million to $118 million, or $.86/diluted share, up 48.3% from $.58/diluted share. (These results include results from the newly acquired Special Metals operation). This quarter's results exceeded analysts' expectations of $.74/share. Sales results also exceeded expectations of $1.06 billion.
4 . How about longer-term financial results?
Reviewing the Morningstar.com "5-Yr Restated" financials, we can see that revenue, which dipped from $2.2 billion in 2002 to $1.8 billion in 2003, has subsequently steadily increased to $3.5 billion in 2006 and $3.8 billion in the trailing twelve months (TTM).
Earnings, however, have been quite erratic, increasing from $.41/share in 2002 to $1.17/share, then dropping to a loss of $(.01)/share in 2005, increasing to $2.58/share in 2006 and $2.85/share in the TTM.
The company has increased shares somewhat from 103 million in 2002 to 133 million in 2006 and 135 million in the TTM.
Free cash flow has been strongly positive if not steady with $87 million in 2004, $292 million in 2005, dropping to $132 million in 2006 and $227 million in the TTM.
The company has a relatively small amount of cash with $97.8 million reported. When combined with the $1.8 billion in other current assets, results in a total current assets of $1.91 billion. When compared to the $1.1 billion in current liabilities, results in a 'current ratio' of 1.74.
5. How about some valuation numbers on this stock?
Reviewing Yahoo "Key Statistics" on Precision Castparts, we find that this is a large cap stock with a market capitalization of $8.11 billion. The trailing p/e is a moderate 21.02 and the forward p/e (fye 02-Apr-08) is even nicer at 13.74. With the rapid growth in earnings anticipated, the PEG works out (5 yr expected) to a very nice 1.10. From these parameters the stock appears reasonably valued.
Examining the Fidelity.com eresearch website for data on PCP, we can see that this company is in the "Steel & Iron" industrial group. Relative to the Price/Sales ratio, this stock is the richest in valuation in the group with a Price/Sales ratio of 2.1. This is followed by Oregon Steel Mills (OS) at 1.3, Nucor (NUE) at 1.1, Steel Dynamics (STLD) at 1.1 and Gibraltar Industries (ROCK) at 0.5.
Insofar as profitability is concerned, as measured by the Return on Equity (ROE), PCP is also near the bottom of the 'heap'. Topping this list is Nucor with a ROE of 33.3%, followed by Steel Dynamics (STLD) at 29.1%, Oregon Steel at 22.8%, Precision at 18.6%, and Gibraltar Industries at 10.3%.
Returning to Yahoo, we can see that there are 135.48 million shares outstanding with almost all, 134.87 million share, that float. Of these that float, 1% or 1.38 million shares are out short representing a short ratio of 1.2. The company pays a dividend of $.12/share yielding 0.2%. The last stock split was a 2:1 split on September 9, 2005.
6. What does the chart look like?
Reviewing the "Point & Figure" chart from StockCharts.com on PCP, we can see that the stock, which drifted lower between July, 2001 when the stock was trading at $15.50, hit a low of $8.50 in October, 2002. The stock broke through resistance in July, 2003, at $17 and has traded higher since. The upward move of this stock chart appears to have slowed but is still moving higher.
7. Summary: What do I think about this stock?
Let's review some of the observations I have made above. First of all, the stock moved nicely higher on the heels of a 'top millennium' stock on Motley Fool. The latest quarter was quite strong with solid growth of both earnings and revenue with the company beating expectations on revenue and earnings results. On Morningstar.com, except for the erratic earnings, the company has produced solid revenue growth, a reasonable balance sheet, and a strong chart to boot! On the downside, while the p/e isn't bad and the PEG is just over 1.0, the Price/Sales as well as the Return on Equity numbers left a little to be desired. I am willing to overlook those valuation numbers in light of the phenomenal earnings report and the possibility of future earnings growth. Overall, I like this company a lot! (Good pick George!)
Of course, since I have not sold any portion of my stocks at a targeted gain, I am still not 'elibible' to be buying a new position. But if I were.....this would be the kind of stock that I would be looking at!
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