Precision Castparts Corp.(PCP) is a good company with an excellent Balance Sheet and a moderately cheap stock price. Long-term investors would do well to consider adding this stock to their portfolio for the following reasons:
1. Business Model:
The company attempts to maintain its position as one of the largest metal parts manufacturers for the aerospace industry. It does so by offering low cost, high quality products and maintaining efficiency in its delivery of products. The company is also focused on acquiring companies that offer similar products, so as to diversify its range and achieve economies of scale.
The company manufactures complex metal components in Investment Cast Products, Forged Products and Fastener Products.
Precision Castparts is the market leader in manufacturing large, complex structural castings. They manufacture the largest diameter stainless steel, nickel-based superalloy and titanium investment castings in the world. It is also the leading manufacturer of airfoil investment castings used in jet aircraft engines.
The company shares its competitive advantage in its Annual Report, as seen below:
"Because of the complexity of the manufacturing process and the application of proprietary technologies, we are currently one of the few manufacturers that can consistently produce the largest, complex structural investment castings in quantities sufficient to meet our customers' quality and delivery requirements. Our emphasis on low-cost, high-quality products and timely delivery has enabled us to become the leading supplier of structural and airfoil castings for jet aircraft and IGT engines."
The company has long standing loyal customers and maintains efficiency in its production and management to maintain those relationships. In addition, the company has been focused on acquisitions in the aerospace industry to increase its range of products. This helps the company become more specialized and keep competitors at bay.
The company has made key acquisitions in the aerospace industry to maintain its competitive position in the market. In 2011, the company acquired "Tru-Form," an operating unit of GE. Tru-Form is a leader in the manufacture of different components for jet engine and gas turbine applications. The acquisition broadened the company's product range in the aerospace industry.
In addition, the company acquired Primus International, a leading supplier of aerostructures and complex components to the global aerospace industry.
Precision Castparts has been on an acquisition binge over the last decade, completing 27 acquisitions as of November 2012. These acquisitions, some of which were in the aerospace industry, would help it diversify its range of products and help it maintain/gain leadership in its current portfolio.
Mark Donegan, the company's CEO, and has done a fabulous job of increasing sales and creating a sustainable advantage for the company. For instance, when Donegan became the CEO of the company, the company was in a downturn. Donegan, to improve the performance of the company, offered major aerospace customers deflationary prices in exchange for longer term contracts. This approach worked and led to the largest number of parts under development in the company's history. As a result, the company enjoyed unprecedented sales levels.
The company offers a Management Development Program to college graduates. This program attempts to help grow the youngsters into exceptional leaders who can run the company in the years to come.
Clearly, the company has very good management and is actively developing managers for the future. This would help the company find leaders internally. Also, these leaders will have spent their entire careers at the company and will be deeply vested in its success.
4. Cash Reserves:
Based on the 2012 Annual Report, the company had an exceptional Current Ratio at 3.53. The Current Assets were $3.78 billion while the Current Liabilities were $1.07 billion.
This is great news for long-term investors since this company has managed its liquidity very well and can be relied upon for long term success.
In addition, the long term debt to equity ratio was very low at .024.
Clearly, the company has one of the best Balance Sheets in the market, and the management deserves all the accolades for it.
5. Stock Price:
The company trades at a trailing PE ratio of 20.25. This is a very good price, especially considering the good business model and the exceptional financials of the company. The company pays a dividend too. The current dividend yield is .06%.
Even though the dividend is low and insignificant, the company's relatively low PE ratio makes this stock a buy.
Precision Castparts is a great company with great books. It is focused on maintaining its leadership in the industry and has introduced several initiates for that purpose. That includes a leadership program for college graduates, and stepping up acquisitions.
Long-term investors (those who don't plan to sell the stock for the foreseeable future) are strongly recommended to consider purchasing this stock for all the above reasons.