Precision Castparts Posts Blockbuster Fourth Quarter Results

| About: Precision Castparts (PCP)

Best Ideas Newsletter holding Precision Castparts (NYSE:PCP) leveraged powerful top-line expansion into terrific earnings growth during its fiscal fourth quarter. Revenue surged 25% year-over-year to $2.4 billion, which was roughly in-line with consensus estimates. Earnings followed suit, increasing 22% year-over-year to $2.82 per share, which was stronger than consensus expectations. While the company took on some debt in order to acquire Titanium Metals (Timet), total cash generation for fiscal year 2013 totaled $437 million (ex-acquisitions).

On a segment basis, Investment Cast Products increased 5% year-over-year to $635 million during the fourth quarter. Yet, more impressive was the strong increase in operating margins, which advanced 110 basis points to 33.7%, driving income growth of 9%. Incremental margins on aerospace OEM products remain strong, and the firm believes it has some opportunities to increase revenue beyond OEM production rates with build rate increases.

Forged product experienced robust 31% year-over-year sales growth to $1.2 billion, driven largely by the inclusion of Timet. Contractual material price increases during the quarter were relatively nil, and selling prices of metal were down slightly, so segment operating margins were only 10 basis points higher at 22.6%. However, further integration of the Timet acquisition and additional efficiency gains could provide positive operating margin catalysts going forward. We've been huge fans of the deal since CEO Mark Donegan announced the prospects for synergies in late January. The deal is still in the early stages of integration at this point. We said then, and still believe now, that Donegan is perhaps the most talented CEO in our entire coverage universe in extracting efficiencies and cost-savings from newly-acquired entities, and we think he will deliver in a big way with Titanium Metals.

Airframe Product growth was also superb, jumping 40% year-over-year to $685 million. Operating income in the segment increased by 42% as the firm was able to modestly leverage its sales to increase margins 30 basis points year-over-year to 28.9%. Although acquisitions accounted for a great deal of the strength, organic revenue growth was still 10% as the company continues to grow with 787 production rates. While acquisitions weighed on operating margin expansion, the firm noted that additional operational improvements could drive great expansion going forward.

Donegan sounded very optimistic about the company's future growth opportunities, saying:

"We have focused on and have been diligent in acquiring the right assets over the last few years, and now those acquisitions have started to deliver on the value we anticipated. Our fourth quarter performance is only an initial data point on a long continuum for improved sales and earnings performance in the future."

We continue to be pleased with Precision Castparts' execution, and it remains among our favorite names in the aerospace supply chain. We've held shares in the portfolio of our Best Ideas Newsletter since June 2011 for a gain 36%. We anticipate further upside in the coming fiscal year, and we do not plan to exit our position in the near future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: PCP is included in the portfolio of our Best Ideas Newsletter.