Aerospace metal-casting supplier Precision Castparts (click ticker for report: PCP) reported strong fiscal first-quarter results Thursday. Revenue advanced nearly 18% from the same period a year ago, and the company was able to leverage that growth into record profits, with earnings per share from continuing operations coming in at $2.35 (up from $1.97 per share in last year’s quarter). Consolidated segment operating profit jumped by nearly 23%, as segment operating margins expanded roughly 120 basis points, to 26.2%. Free cash flow generation from the company was also strong, totaling $375 million before acquisitions and voluntary pension contributions, or about 20% of sales in the quarter (a very impressive showing). Our fair value estimate remains unchanged.
The company’s investment cast products segment advanced 9% from the same period last year, and both segment operating income and segment margins expanded during the quarter. We’re viewing this as yet another positive sign regarding the strength of commercial aerospace demand. Precision Castparts noted increased base production rates at the airframe makers, further rate increases on the 787 Dreamliner platform, and solid aftermarket demand. Revenue in the firm’s forged products segment and fastener products segments jumped 13% and 42%, respectively, though both segments were bolstered by acquisitive activity. Operating income expanded in both segments but operating margins only advanced in the firm’s forged products segment. The firm’s fastener products segment experienced margin pressure, but we view such deterioration as more related to mix (from acquisitions) than any concerning trend to extrapolate.
Precision Castparts noted that its aerospace and power end markets remain solid, and based on some of the trends we’ve been witnessing, we agree. The company is looking forward to increased narrowbody and widebody aircraft deliveries in coming years (inclusive of higher 787 build rates). Plus, the high availability and low cost of natural gas is proving to be a tailwind for industrial gas turbine aftermarket sales. The firm also noted a robust pipeline from its oil and gas customers as it delivers on a couple large orders (Saudi Aramco and ADNOC) through the back half of this fiscal year and into next.
All things considered, we thought Precision Castparts’ quarter was solid. The firm will face some near-term headwinds as a couple forging presses will need unexpected repairs in coming weeks, but its exposure to the robust aerospace end market has never been stronger. We continue to hold the company in the portfolio of our Best Ideas Newsletter.