Precision Castparts: This Stock Pick is On a High Altitude Flight

Precision Castparts (PCP) makes metal components and products used in aircraft engines, industrial turbine engines, airframes, medical prostheses, and other industrial applications. If you're looking for the next big thing of the information age, this is not the stock for you. Investors looking for a well-established yet fast-growing business, on the other hand, might find Precision Castparts of interest. In its last quarterly earnings report, the company reported a 69% increase in earnings for the latest quarter on a 62% gain in sales. At $103.88 currently, the stock is up nearly $40 since we wrote about it last July.

This is a fairly large company with sales of $4.79 billion in the past year. Precision Castparts has a market capitalization of $14.2 billion. Profits are large as well, with the company expected to deliver earnings of $4.30 per share this fiscal year ending March 30. That's a 67% increase from ! FY2006 and up from $1.82 in FY2005. The consensus is for EPS of $5.41 next year.

Those are some big numbers driven by the cyclical upturn in the aircraft industry which it serves. The aerospace industry has very long and often severe ups and downs, so when the cycle starts to turn up as they are doing now, investors find stocks like PCP very attractive as they anticipate a multi-year boom for the business. Plane makers like Boeing (BA) and Airbus have received some big orders in the past few years, igniting a fire under aviation component suppliers.

Investors started pouring into this stock in early 2003. PCP has come from the low-teens then (split-adjusted) to triple digits now. Fortunately, Precision Castparts has the numbers to back up that performance. Earnings have averaged 64% annual growth over the past five years. The stock is trading at a Price/Earnings (P/E) ratio of 19.2 using for ward 12-month estimates.

In addition to the rebound for the commercial aerospace industry, military spending has been a source of strength for aircraft component suppliers. There is concern about the health of the U.S. airline industry, though. Most of the new plane orders have been from European and Asian carriers. The U.S. airlines are in very strained financial positions, so bankruptcies and consolidation are the order of the day rather than orders for new planes.

For the next few years, though, the business outlook for Precision Castparts looks very rosy indeed. Some analysts expect the commercial aircraft recovery to extend over the next four to five years. Annual sales for Precision Castparts are expected to swell to $5.3 billion for the fiscal year just ending and $6.2 billion next.

The company raised its dividend several times in the last two years, but it's not a high-yielder at just 0.10% currently. Income potential isn't what will draw investors to this stock, though, it's for those who are looking to the catch the powerful wave of a recovery in commercial aerospace and the big profits that a supplier like PCP can earn. This stock has already come a long way in the past few years, though, so investors should have a firm awareness of where we are in the cycle and how much of the future boom is already priced into the stock.

PCP 1-yr chart

Disclosure: Author has no position in PCP