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Precision Castparts: An Abandoned Growth Story, Part II 3 comments

by: Jeffrey Lin June 20, 2008 | about: PCP    
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We’ll group these two markets together because the use of special metals from the likes of PCP for power generation and industrial markets are often very similar.

INDUSTRIAL GAS TURBINE (IGT)

This is the main driver for these two markets and why the power generation/industrial markets have so much potential for PCP. What are IGT’s? IGT is just a fancy name for jet engines that are used to generate power. Jet Engines just might be the most common way of generating power for heavy duty jobs from natural gas power plants to huge cargo ships. Since PCP is already the best at making jet engine parts for planes, making jet engine parts for other uses is a piece of cake.

Note: The momentum in IGT should prove even more lucrative for Woodward Governor, who has more than 60% in Turbine control technology. Basically, Woodward Governor’s control technology makes the IGT’s smart: allows IGT’s to operate under more situations, allows the IGT’s to self adjust during operations, and makes IGT’s more efficient and last longer, etc.

Estimates for IGT production will grow from about $9 Billion in 2007 to $15 Billion in 2011. IGT aftermarket and services are expected to grow from $1.3 Billion in 2005 to $1.7 Billion in 2010. The biggest players, GE and Seimens, are too big and diversified for this growth in IGT’s to significantly move their stock, which is why we’re turning to component players like Precision Castparts and Woodward Governor.

Why are IGT’s selling like hot cakes?
I found out from the Goldman Sachs Eighth Annual Power and Utility Conference that took place May 13-14, 2008. All the major utilities expressed the same outlook: natural gas will be the main source of electric power for this country for the foreseeable future…and short/medium term for these guys is looking out to 2030! Here’s why. Electricity demand continues to grow, but old coal power plants are being decommissioned while no new coal plants are built because of environmental concerns. Alternative energy sources like wind and solar are too unreliable and limited to replace the coal power plants. (For example, how dangerous would it be if the wind died down and stopped producing power for a hospital?) The only fuel clean enough and abundant enough is natural gas, which uses IGT’s to generate power. Also, natural gas power plants are much cheaper and faster to build compared to years and decades for coal and nuclear plants.

Gas turbine electrical generation has much to recommend it. The capital costs of gas turbine electric power plants are the lowest of all. A light water nuclear power plant may cost as much as $4,000 per kilowatt. An installed kilowatt of a coal-fired steam turbine power plant might be $1,200 to $1,600. The latest gas turbine figures given by Gas Turbine World in its 2007-08 GTW Handbook are as low as $200 per kilowatt for simple cycle and $400 per kilowatt for combined-cycle gas turbine power plants. ” ~ Lee S. Langston (Professor Emeritus of the mechanical engineering department at the University of Connecticut in Storrs),

Changing the Game,” Mechancial Engineering Magazine, May 2008.

International markets are driving the IGT demand, but it is clear North America will catch up quickly. Asia Pacific has the highest demand, followed by Europe and the Mid East, but the Mid East demand is accelerating (probably because cities like Dubai are the few foreign places that uses more Air Conditioning and electricity per person than the U.S.)

Traditionally, IGTs use in power generation has been limited, only being turned on at peak power consumption periods to make up that little extra power people need during summer afternoons. The quality for these IGTs didn’t matter much because they weren’t used much. However, going forward, for natural gas to replace coal as well as meet growing demand, power plants will need a lot more IGTs. Very high quality IGTs. And much bigger IGTs.

IGTs of this size and quality are high end products. Few companies, if any, have PCP’s facilities and abilities to make the IGT parts, so I’m not worried about competition here. These IGTs will be running nonstop to generate power and running at high speeds to generate more power. Future IGTs used in power plants will take a lot of abuse, so PCP’s parts are needed to handle that abuse. Luckily, PCP serves the aftermarket as well and will benefit greatly from repairs and replacements.

Currently, most IGTs are still fairly inefficient, some industrial uses of IGT’s operating below 30% efficiency. Meanwhile, Subcritical (traditional) fossil fuel power plants can achieve 36–38% efficiency. Supercritical designs have efficiencies in the low to mid 40% range, with new “ultra critical” designs using pressures of 4,400 psia (30 MPa) and dual stage reheat reaching about 48% efficiency. However, newer IGT’s such as the Mercury 50 commercial electric-power gas turbine can get 50% efficiency and currently powers the 8,000 student Fairfield University in Connecticut, all the electrical and heat needs, with just a street-line natural gas fuel supply.

PCP makes several times more per IGT now than ever.

PCP has about $3M of stuff in the 275MegaWatt/50Hz models used in internationally, and $1.5M of stuff in the 185MegaWatt/60Hz models used in North America. (For reference, a typical coal power plant can generate about 600MegaWatt). PCP has parts in IGTs by GE, Seimens, and Alstrom, who together make up ~75% of the IGT market.

PCP has products in both OEM and aftermarket

“Pratt & Whitney [division of United Technologies (UTX)] Power Systems (PWPS) embarked on its mission to manufacture and repair industrial gas turbine (IGT) components several years ago and has witnessed exponential growth in the area over the past two to three years, according to Steve Hilton, IGT parts manager for the company’s aftermarket business in Windsor, Connecticut, U.S.A. “Our original business initiative was undertaken because there’s such a large IGT potential in the marketplace.” ” ~Mark McNeely, “IGT Parts, Repairs Grow for Pratt & Whitney Power Systems,” Diesel & Gas Turbine Worldwide, June 2007 Issue.

Demand strong
PCP building 2 IGT factories: Painesville, Ohio facility will start production in the September ‘08 quarter and the Portland, Oregon facility will start in the January ‘09 quarter. This means the investments into these two facilities, and thus pressure on margins, is done and margins will expand as revenues will increase with production. Consider the contract wins by the likes of GE within just the past month to see the ridiculous demand and flexible uses of IGT’s (from Diesel and Gas Turbine Worldwide Publications):

SEAMLESS EXTRUDED PIPES
Every we hear of how much more power, oil, and gas infrastructure we need and we often think of Flowserve (FLS) as the best play, although SPX Corp (SPW) isn’t far behind. However, PCP benefits alongside Flowserve. “Newer” fuels such as Liquid Natural Gas [LNG] require special metals when storing, transporting, and using these fuels. Natural gas only becomes liquid natural gas by cooling it to below -260 F (-163 C). Your everyday Home Depot pipes probably can’t handle such an extreme liquid. PCP makes various pipes for these applications. Again, PCP’s value is not just providing special metals but making the metals in complex shapes and configurations.

  • over $600M backlog at then end of ‘08
  • shipments growing at 25% per year
  • mainly into international infrastructure products such as India and China, not even selling into North America yet.

As mentioned above in the Industrial Gas Turbine [IGT] section, North America continues to need more electricity but we’re losing old coal power plants and environmentalists won’t let us build new ones. Other than building more natural gas plants using IGT’s, utilities are also planning to generate more power at the coal power plants they have left. This means upgrading, if not outright building new coal plants with advanced technology.

To generate more power at each plant, utilities will have to use supercritical and even “ultra critical” boiler designs. (as mentioned before, Supercritical designs have efficiencies in the low to mid 40% range, with new “ultra critical” designs using pressures of 4,400 psia (30 MPa) and dual stage reheat reaching about 48% efficiency. ) These are scary extreme conditions…people would probably die instantly in one of these, or vaporize. Ok… not actually vaporize, that only happens when a squad of F-16’s drops thermite plasma bombs directly on you in a fictional movie filmed on Alcatraz… Still, these conditions require sci-fi like materials that companies like PCP are just developing given advances in technologies.

PREVIOUS
- Part 1: IGT) This is the main driver for these two markets and why the power generation/industrial markets have so much potential for PCP. What are IGT’s? IGT is just a fancy name for jet engines that are used to generate power. Jet Engines just might be the most common way of generating power for heavy duty jobs from natural gas power plants to huge cargo ships. Since PCP is already the best at making jet engine parts for planes, making jet engine parts for other uses is a piece of cake. Note: The momentum in IGT should prove even more lucrative for Woodward Governor, who has more than 60% in Turbine control technology. Basically, Woodward Governor’s control technology makes the IGT’s smart: allows IGT’s to operate under more situations, allows the IGT’s to self adjust during operations, and makes IGT’s more efficient and last longer, etc. Estimates for IGT production will grow from about $9 Billion in 2007 to $15 Billion in 2011. IGT aftermarket and services are expected to grow from $1.3 Billion in 2005 to $1.7 Billion in 2010. The biggest players, GE and Seimens, are too big and diversified for this growth in IGT’s to significantly move their stock, which is why we’re turning to component players like Precision Castparts and Woodward Governor. Why are IGT’s selling like hot cakes? I found out from the Goldman Sachs Eighth Annual Power and Utility Conference that took place May 13-14, 2008. All the major utilities expressed the same outlook: natural gas will be the main source of electric power for this country for the foreseeable future…and short/medium term for these guys is looking out to 2030! Here’s why. Electricity demand continues to grow, but old coal power plants are being decommissioned while no new coal plants are built because of environmental concerns! Alternative energy sources like wind and solar are too unreliable and limited to replace the coal power plants. (For example, how dangerous would it be if the wind died down and stopped producing power for a hospital?) The only fuel clean enough and abundant enough is natural gas, which uses IGT’s to generate power. Also, natural gas power plants are much cheaper and faster to build compared to years and decades for coal and nuclear plants. “Gas turbine electrical generation has much to recommend it. The capital costs of gas turbine electric power plants are the lowest of all. A light water nuclear power plant may cost as much as $4,000 per kilowatt. An installed kilowatt of a coal-fired steam turbine power plant might be $1,200 to $1,600. The latest gas turbine figures given by Gas Turbine World in its 2007-08 GTW Handbook are as low as $200 per kilowatt for simple cycle and $400 per kilowatt for combined-cycle gas turbine power plants. ” ~ Lee S. Langston (Professor Emeritus of the mechanical engineering department at the University of Connecticut in Storrs), “Changing the Game,” Mechancial Engineering Magazine, May 2008. International markets are driving the IGT demand, but it is clear North America will catch up quickly. Asia Pacific has the highest demand, followed by Europe and the Mid East, but the Mid East demand is accelerating (probably because cities like Dubai are the few foreign places that uses more Air Conditioning and electricity per person than the U.S.) Traditionally, IGT’s use in power generation has been limited, only being turned on at peak power consumption periods to make up that little extra power people need during summer afternoons. The quality for these IGT’s didn’t matter much because they weren’t used much. However, going forward, for natural gas to replace coal as well as meet growing demand, power plants will need a lot more IGT’s. Very high quality IGT’s. And much bigger IGT’s. IGT’s of this size and quality are high end products. Few companies, if any, have PCP’s facilities and abilities to make the IGT parts, so I’m not worried about competition here. These IGT’s will be running nonstop to generate power and running at high speeds to generate more power. Future IGT’s used in power plants will take a lot of abuse, so PCP’s parts are needed to handle that abuse. Luckily, PCP serves the aftermarket as well and will benefit greatly from repairs and replacements. Currently, most IGT’s are still fairly inefficient, some industrial uses of IGT’s operating below 30% efficiency. Meanwhile, Subcritical (traditional) fossil fuel power plants can achieve 36–38% efficiency. Supercritical designs have efficiencies in the low to mid 40% range, with new “ultra critical” designs using pressures of 4,400 psia (30 MPa) and dual stage reheat reaching about 48% efficiency. However, newer IGT’s such as the Mercury 50 commercial electric-power gas turbine can get 50% efficiency and currently powers the 8,000 student Fairfield University in Connecticut, all the electrical and heat needs, with just a street-line natural gas fuel supply! PCP makes several times more per IGT now than ever. PCP has about $3M of stuff in the 275MegaWatt/50Hz models used in internationally, and $1.5M of stuff in the 185MegaWatt/60Hz models used in North America. (For reference, a typical coal power plant can generate about 600MegaWatt). PCP has parts in IGT’s by GE, Seimens, and Alstrom, who together make up ~75% of the IGT market. PCP has products in both OEM and aftermarket “Pratt & Whitney [division of United Technologies (UTX)] Power Systems (PWPS) embarked on its mission to manufacture and repair industrial gas turbine (IGT) components several years ago and has witnessed exponential growth in the area over the past two to three years, according to Steve Hilton, IGT parts manager for the company’s aftermarket business in Windsor, Connecticut, U.S.A. “Our original business initiative was undertaken because there’s such a large IGT potential in the marketplace.” ” ~Mark McNeely, “IGT Parts, Repairs Grow for Pratt & Whitney Power Systems,” Diesel & Gas Turbine Worldwide, June 2007 Issue. Demand strong PCP building 2 IGT factories: Painesville, Ohio facility will start production in the September ‘08 quarter and the Portland, Oregon facility will start in the January ‘09 quarter. This means the investments into these two facilities, and thus pressure on margins, is done and margins will expand as revenues will increase with production. Consider the contract wins by the likes of GE within just the past month to see the ridiculous demand and flexible uses of IGT’s (from Diesel and Gas Turbine Worldwide Publications): Industry News New Alstom Contracts Worth up to US$1.5 Billion Contracts cover 1280 MW GT26-based combined-cycle power plant in the Netherlands… Read morePower Generation News Capstone Receives Order from Pemex US$1.5 Million order to include new units, equipment upgrades, spare parts and service… Read morePower Generation News Peter Brotherhood Secures another Order in Pakistan Order covers 15 MW steam turbo-generator set… Read morePower Generation News Rolls-Royce Wins New Thailand Power Contract Three gas turbine packages include two for gas compression and one for electric power generation… Read moreMarine Propulsion News MTU Power for North Sea Emergency Tugboat New order worth approximately US$15 million, covers special Series 8000 and 4000 engines… Read moreOil & Gas News Rolls-Royce Upgrade for China’s West-East Gas Pipeline Upgrade includes new gas turbine compression set and a compressor upgrade… Read moreMarine Propulsion News GE Logs First Marine Order in Turkey Order includes 12- and 16-cylinder V228 engines for tugboats… Read moreOil & Gas News Petrobras Selects Rolls-Royce for New Brazilian Gas Projects RB211-G62 gensets and 501-based gensets for Brazillian gas projects… Read morePower Generation News Algerian Contract for GE Energy Worth Close to US$1Billion New plant to boost country’s installed capacity by 18 percent… Read morePower Generation News Tognum Supplies Engines for South Africa Power Generation Contract covers 140 engines for a volume of more than 5 million Euros… Read more SEAMLESS EXTRUDED PIPES Every we hear of how much more power, oil, and gas infrastructure we need and we often think of Flowserve (FLS) as the best play, although SPX Corp (SPW) isn’t far behind. However, PCP benefits alongside Flowserve. “Newer” fuels such as Liquid Natural Gas (LNG) require special metals when storing, transporting, and using these fuels. Natural gas only becomes liquid natural gas by cooling it to below -260 F (-163 C). Your everyday Home Depot pipes probably can’t handle such an extreme liquid! PCP makes various pipes for these applications. Again, PCP’s value is not just providing special metals but making the metals in complex shapes and configurations. over $600M backlog at then end of ‘08shipments growing at 25% per yearmainly into international infrastructure products such as India and China, not even selling into North America yet. As mentioned above in the Industrial Gas Turbine (IGT) section, North America continues to need more electricity but we’re losing old coal power plants and environmentalists won’t let us build new ones. Other than building more natural gas plants using IGT’s, utilities are also planning to generate more power at the coal power plants they have left. This means upgrading, if not outright building new coal plants with advanced technology. To generate more power at each plant, utilities will have to use supercritical and even “ultra critical” boiler designs. (as mentioned before, Supercritical designs have efficiencies in the low to mid 40% range, with new “ultra critical” designs using pressures of 4,400 psia (30 MPa) and dual stage reheat reaching about 48% efficiency. ) These are scary extreme conditions…people would probably die instantly in one of these, or vaporize! Ok… not actually vaporize, that only happens when a squad of F-16’s drops thermite plasma bombs directly on you in a fictional movie filmed on Alcatraz… Still, these conditions require sci-fi like materials that companies like PCP are just developing given advances in technologies. PREVIOUS - Part 1: Overview of an Abandoned Growth Story NEXT - Part 3: PCP’s Commercial Airline and Aerospace markets **Disclosure: I own shares of PCP, SPW, WGOV as of this post**'>Overview of an Abandoned Growth Story

NEXT
- Part 3: PCP’s Commercial Airline and Aerospace markets

**Disclosure: I own shares of PCP, SPW, WGOV as of this post**

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This article has 3 comments:

  •  
    Great and insightful article. I'm glad I'm long on PCP. Thoughts on WGOV in terms of EPS over next 2-3 years? Sales growth seems to be slowing 4 MRQ's.....thanks!
    2008 Jun 20 03:46 AM | Link | Reply
  •  
    totally agree with your assessment.
    2008 Jun 20 11:17 AM | Link | Reply
  •  
    I find this article interesting, but it you only knew what kind of labor issues PCP has, you'd possibly think twice.

    The mid-management there are put in charge of areas which they have no expertise or knowledge, then blunder through problems they create themselves. Upper management has no clue as to what's going on because the mid's are covering up the problems before it's discovered by their bosses.

    Also, the attendance policies are draconian, to say the least. Their own policies end up culling out some of the better workers because of illnesses, family problems, etc.

    In case you haven't figured it out, I AM an employee there. I do enjoy my work for it is challenging, but the middle management is erratic and makes the job far more problematic than it ever should be. Many come from areas and fields that have nothing to do with those areas that they supervise (like management of a cabinet shop, now managing a foundry).

    PCP is a company who can't help BUT make money because of the field it's in, but if the management isn't fixed, at some point this weakness will become apparent and could possible end up being their Achilles Heel.
    2008 Sep 02 05:32 AM | Link | Reply
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