Metal-bender and best idea, Precision Castparts (PCP) reported excellent fiscal first-quarter results Thursday that showed continued strength in the commercial aerospace end market and additional traction in industrial gas turbines (sales were up 15%) and its seamless pipe business (sales were up 28%). We think the name is still worthy of a position in our Best Ideas portfolio.
Precision’s sales jumped 16% in the quarter, and the firm was able to leverage that growth into a 19% year-over-year improvement in operating income. The company’s consolidated segment operating margin jumped to 25% from 24.3% in the year-ago period. We continue to believe Precision Castparts is a prime beneficiary of the strengthening build rates of commercial airplanes during the next few years, prompted by production increases at Boeing (BA) and Airbus (EADSY.PK) – particularly in the narrowbody segment (737, A320). We think the recovery in its power end markets (gas tubines) and seamless pipe business will only further augment the tremendous potential in commercial aerospace in the coming quarters.
In all, we were pleased with Precision’s quarter and believe the stock has further room to run higher (our target is $200 per share) based on traditional earnings multiples attached to the company during prior commercial delivery upswings. We’d only look to scale back our position in the event of margin pressure, an acquisition that runs counter to Precision’s core markets, or if our exposure to commercial aerospace becomes too large of a percentage of the portfolio.