As Precision Castparts (BATS:PCP) keeps running away from me, I’ve been searching for the “next play” in specialized/engineered metals and materials. In this new age of industrializing the world, specialized materials play a huge role behind the scenes that make this whole process possible.
Working with solid materials might almost seem arcane in this digital age, but material technology has been developing at a rapid pace as well, allowing engineers to design materials down to the very molecule so a material can do whatever you want. This advance allows us to cut out a lot of mechanical systems in certain applications.
For instance, some materials can absorb shock, thus removing the need to build a spring into a system - eliminating the hassle of installing the string, quality control of the string, and wear and tear in the connections. Today’s extreme technologies all need these space-age materials.
Nuclear plants need metals with unnatural properties to withstand the abuse inside. Cell phones now use antennas of just a piece of metal with all the communications properties built into the metal. In my search, I looked at Brush Engineered Materials (NYSE:BW), which is okay. However, Precision Castparts is still best of breed as its portfolio of businesses is in all the right trends from aerospace to nuclear power with international exposure. Here’s the skinny on why I don’t like Brush Engineered Materials as much.
Simply looking at Brush’s revenue by markets in 2006, they have 42% in telecom and computers, 12% in data storage (I’d also consider that computers), 10% aerospace and defense, 10% automotive electronics, 9% industrial components, 6% appliance, and 11% other. Thus, Brush is more of a tech components play (54% of revenues).
Although tech is the go-to kid for this market right now, I still consider tech more fickle than industrial growth, of which Brush only gets 19% revenues from (aerospace and industrials). As for automotive electronics, I’ve written about this before, always go with Honeywell or Johnson Controls.
Digging just below the surface you’ll find Brush’s products are not big fanblades or turbines that Precision Castparts makes but small, sometimes disposable, components. Looking at it’s significant tech business, the company often showcases its developments in the data storage business. Their data storage business makes hard drive assembly arms (sort of like the needle on old record players used to play the records…yeah remember those? some call it “turntables” now…)
With talks of laptops ditching these old hard drives and going to the flash disks like those on mp3 players, products like these will be obsolete for Brush really soon. The funny thing is, their other developments for special materials such as the perpendicular magnetic recording that will allow more data storage per square area sounds promising as we try to stuff more storage into ever smaller devices. Devices this small can’t use the traditional hard drives that spin around with moving parts.
My point here isn’t that they have competing products. They have to keep developing new products to keep up with the new trends and demand. My point is that tech, especially the independent developers, and even more so for hardware is a very uncertain business. Trends keep changing and you have to have continuous research and development, much of which needs to be done far in advance and might end up being worthless if someone develops a better product, or if the whole tech world just changes.
For instance, it isn’t all that hard to imagine broadband internet everywhere soon. We would just store stuff online and not even need mobile data storage. Finally, there’s a lot of competition both in current tech components and developing components. With companies like Apple constantly searching for the lowest cost producer, it will be hard for any supplier to maintain enough momentum and break out into a stable business.
Brush also seems proud of their proprietary material Toughmet, a copper-nickel-tin alloy that is amazingly strong and durable. Toughmet seems particularly well suited for punishing industrial applications. For instance, Toughmet is used for making long-lasting oil drill bits to the bushings upon which all the weight of coal mining trucks rest.
The conditions under which Toughmet can still perform the way it does is amazing, and companies should be choosing the best materials both for safety and job consistency. The few concerns are these. First, I would like to see more sales to the industrial end market.
These “consumable” applications such as drill bits are precisely the applications that Brush should market Toughmet aggressively. Parts and pieces will be constantly in demand while global growth continuously uses them up. The second question is, how successfully can Brush pass on the material cost? With Toughmet made of copper, nickel, and tin (yes those lovely commodities that keep going up everyday!), I would hate to be the leg of the supply chain that has to eat the cost of these things.
Overall, decent company and okay to ride along this latest tech wave as tech trends, while they change fast, do not change over night. But why “speculate” in a supplier like Brush when it’s so much easier to ride the price makers like Apple or Research in Motion? Same deal with the industrials/aerospace/oil service exposure.
Sticking with the materials theme, Precision Castparts and Allegheny Technologies are so much better for such exposure as they’re pure plays in these industries. Furthermore, the products and materials PCP and ATI makes are in high demand and short supply as new production for materials like titanium are surprisingly slow.