On Friday, Precision Castparts (click ticker for report: ) announced that it has entered into an agreement to buy Titanium Metals (click ticker for report: ) for $16.50 per share in cash, roughly in line with our fair value estimate. We’re huge fans of this deal and expect Precision Castparts to extract significant synergies, similar to what it was able to accomplish when it bought Special Metals in 2006. Precision Castparts’ CEO Mark Donegan is perhaps the best aerospace executive when it comes to integrating acquisitions and delivering value to shareholders. The tie-up provides Precision Castparts with valuable titanium capacity, and we think the deal helps Precision optimize its supply chain by giving it greater control of input costs via vertical integration. The transaction will be immediately accretive to earnings, and the potential for Precision to expand operating margins is significantly enhanced with this transaction. We would not be surprised to see Precision Castparts’ shares converge to our fair value estimate (about $200 per share) in coming months on the optimism surrounding this transaction. We plan to drop coverage of Titanium Metals at the end of December, once the tender offer is completed. Precision Castparts remains one of our top aerospace picks in the portfolio of our Best Ideas Newsletter.
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