Metal-bender Precision Castparts (PCP) reported strong fiscal third-quarter results but failed to live up to consensus expectations on the top and bottom line. We continue to believe that Precision Castparts has valuation upside from these levels, but we are more inclined to continue to take profits in the jet-engine castings maker in the portfolio of our Best Ideas Newsletter. Our fair value estimate is unchanged.
Revenue jumped 14% in Precision’s fiscal third-quarter thanks to strength across all of its product lines. Sales of its investment cast products jumped 8%, as aerospace demand continued at a nice pace. We’ll be looking for even stronger performance from its Investment Cast Products segment once production for the Boeing 787 ramps up considerably, likely in Precision’s fiscal third quarter of 2013. Higher aftermarket demand for industrial gas turbines also drove top-line expansion. Revenue in the company’s Forged Products segment increased 9% during the period, and as with its Investment Cast segment, we expect a pick up in coming quarters as the 787 component production ramps up. Precision’s Fastener Products segment’s revenue jumped 35%, though most of the expansion came from recent acquisitions (Primus). We expect revenue growth acceleration in the firm’s Fastener Products segment once the supply chain works though excess inventory and build rates on the Dreamliner increase.
The company improved consolidated segment operating income in the quarter by 19%, as consolidated operating margins swelled to 25.3% versus 24.3% in the same period a year ago. Precision Castparts’ earnings per share hit $2.12 in the period, a new record for the company and up from $1.80 in the year-ago period. However, even these strong results weren’t enough for consensus, which was at $2.21 per share. Despite the miss, we continue to believe that Precision Castparts will be a prime beneficiary of the robust upswing in commercial aerospace demand that will last through the middle of this decade. That said, we plan to prudently reduce our aerospace exposure in the portfolio of our Best Ideas Newsletter as we have benefited greatly from our bullish call on the industry.