On Thursday, Best Ideas Newsletter portfolio holding Precision Castparts (click ticker for report: ) issued decent first quarter fiscal 2014 results. Though performance fell below consensus estimates, the aerospace engine casting provider achieved record diluted earnings per share, record consolidated segment operating margins (27.2%), and strong cash generation in the period. We’re expecting significant earnings expansion in coming years as a result of its recent acquisition of Titanium Metals (TIMET) coupled with the current high-level of commercial aircraft deliveries.
Revenue expanded 20% in the period thanks to elevated aircraft build rates and acquisitive activity, while consolidated segment operating income jumped 25%. The operating margin in its ‘Investment Cast Products’ segment advanced 140 basis points, to 34.6%, despite relatively flat segment revenue performance. Sales in its ‘Forged Products’ division grew 25% thanks to TIMET. We’re already seeing substantial benefits from the acquisition, as the segment operating margin increased 220 basis points to 25.1% (segment operating income jumped 37%). We think segment operating margins in this division will hit the 30% mark within the next few quarters. Revenue in its ‘Airframe Products’ division increased 39%, which drove a 40% increase in segment operating income (segment margin improvement was modest). The division’s performance will be augmented by Permaswage in coming periods. Consolidated net income from continuing operations and earnings per share both grew by 23% during the quarter (a nice clip).
Looking ahead, we were very pleased with commentary by CEO Mark Donegan. Not only is the firm continuing to gain share on new airframe and engine development programs, but acquisition integration efforts remain on track and incremental margins remain robust. Donegan noted that he expects fastener orders to accelerate in coming periods and sees further opportunities with respect to Precision Castparts’ aerostructures business. All-in, it’s hard not to like the firm’s record quarterly performance and strong outlook.
Valuentum’s Take
Precision Castparts is our favorite commercial aerospace supplier. The firm is benefiting tremendously from ongoing strength in commercial aerospace deliveries while management keeps a tight lid on costs. We’re expecting record results again in fiscal 2014, as the firm brings TIMET into the fold. Precision Castparts remains a core holding in the portfolio of our Best Ideas Newsletter.