QUOTE AND NEWS
Market Intelligence Center  Feb 25  Comment 
Option-trade picking algorithms patented by MarketIntelligenceCenter.com found a trading opportunity with Precision Castparts Corp. (PCP) that should provide a 3.43% return in just 114 days. Sell one Jun. '15 call at the $210.00 level for each 100...
TheStreet.com  Feb 23  Comment 
NEW YORK (TheStreet) -- Shares of Precision Castparts Corp. are down 1.66% to $215.97 in morning trading today as Goldman Sachs downgrades the Portland, OR-based aerospace supplier to "neutral" from "buy" and lowers its price target to $223...
Jutia Group  Feb 12  Comment 
[GlobeNewswire] - PORTLAND, Ore. -- The board of directors of Precision Castparts Corp. has declared a quarterly cash dividend of $0.03 per share on the company's common stock payable on March 30, 2015, to shareholders ... Read more on this. ...
Market Intelligence Center  Jan 30  Comment 
The patented option trade-picking algorithms behind MarketIntelligenceCenter.com's Artificial Intelligence Center have selected a covered call trade on Precision Castparts Corp. (PCP) that includes 6.02% downside protection. Sell one contract of...
Benzinga  Jan 23  Comment 
Analysts at Credit Suisse downgraded Precision Castparts Corp. (NYSE: PCP) from Outperform to Neutral. The price target for Precision Castparts has been lowered from $289 to $223. Precision Castparts' shares rose 0.08% to close at $208.91...
Benzinga  Jan 23  Comment 
Motley Fool  Jan 22  Comment 
Precision Castparts reported a disappointing set of earnings and guidance in its third quarter. Here's why.
Wall Street Journal  Jan 22  Comment 
Precision Castparts Corp. said Thursday that falling demand for oil, extended equipment maintenance problems and deferred shipments from aerospace customers led to weak results in the December quarter.




 

Precision Castparts Corp. (NYSE:PCP) makes specialized metal products for the aerospace and power generation industries. PCP's large, complex structural investment castings, airfoil castings, and forged components are used in jet aircraft engines and industrial gas turbines (IGT). Large jet aircraft engines are manufactured by a small number of suppliers, including General Electric, Pratt & Whitney, and Rolls-Royce. Because of the complexity of its castings, and their end-use in dangerous machinery, PCP has long-term relationships with the companies that buy its products. It has been supplying large castings for jet engines to GE for more than 40 years and Pratt & Whitney for 30+ years, while supplying smaller structural castings to Rolls-Royce for over 25 years. The company earned $5.5 billion in revenue and $922 million in net income in 2010.[1]

PCP uses a number of raw materials to make its castings, including certain metals such as cobalt, titanium, nickel, tantalum and molybdenum, which are found in only a few parts of the world and are available from a limited number of suppliers.[2] To combat the risk of rising input costs, PCP acquired Special Metals Corporation (SMC), a world leader in the production of high-performance, nickel-based alloys and super alloys. SMC, in conjunction with PCP's existing high performance alloy production facilities in western Australia and the U.S., made PCP the world’s largest and most diversified producer of high performance nickel-based alloys, supplying over 5,000 customers.

Company Overview

Products[3]

Precision Castparts manufactures complex metal components and products primarily for aerospace, power generation, general industrial and automotive markets. It operates in three segments: Investment Cast Products (34% of sales), Forged Products (41%), and Fastener Products (25%).

Their Investment Cast Products segment includes their subsidiaries PCP Structurals, PCP Airfoils and Specialty Materials and Alloys Group (SMAG). These operations manufacture investment castings for aircraft engines, industrial gas turbine engines, airframes, medical prostheses and other industrial applications primarily in the aerospace and power generation markets. The segment also provides alloys and waxes to PCP’s investment casting operations, as well as to other investment casting companies.

Forged Products’ aerospace and industrial gas turbine (IGT) sales are primarily derived from the same large engine customers served by the Investment Cast Products segment, with additional aerospace sales to manufacturers of landing gear and other airframe structural components. In addition, PCP manufactures high performance nickel-based alloys used to produce forged components for aerospace and non-aerospace markets, which include products for oil and gas, chemical processing, and pollution control applications.

PCP’s IGT products consist of airfoil castings and high-temperature combustion hardware used in large, land-based gas turbines designed for electrical power generation. In addition, they manufacture structural and airfoil castings for aeroderivative gas turbine engines, which are also used for power generation, as well as for other commercial and military land and marine-based applications. Since industrial gas turbines are primarily used in electrical power generation, castings sales for new IGT engines are tied to the growth of global electricity consumption, while demand for replacement parts depends on the size and utilization rate of the installed base.

With the acquisition of SPS Technologies, Inc., PCP has become a leading developer and manufacturer of highly engineered fasteners, fastener systems and precision components, primarily for critical aerospace and automotive applications. Approximately 73 percent of Fastener Products sales come from the same aerospace customer base already served by our Investment Cast Products and Forged Products segments. In this regard, Fastener Products is subject to many of the same market forces as these other two segments. The balance of the segment’s sales derives from automotive and general industrial markets, including farm machinery, construction equipment, machine tools, medical equipment, appliances and recreation.df

Business Growth

FY 2010 (ended March 28, 2010)[1]

  • Net sales declined 19% to $5.5 billion. Aerospace sales fell by 17%, power generation sales fell by 15%, and the sale to general industrial and other markets decreased 30%. The company attributes this to the general weakness in the industrial and power markets and lower average metal selling prices.
  • Net income fell 12% to $922 million.

Trends and Forces

Availability of raw material

PCP uses a number of raw materials in its products, including certain metals such as nickel, titanium, cobalt, tantalum and molybdenum, which are found in only a few parts of the world. These metals are required for the alloys used or manufactured in their investment casting, forged and fastener product segments. The availability and costs of these metals are influenced by private or governmental cartels, changes in world politics, unstable governments in exporting nations and inflation. Similarly, supplies of the tool-grade steel they use may also be subject to variations in availability and cost. For nickel and other metals, PCP has long-term contracts with customers that include escalation clauses that guarantee a change in the agreement price if a particular factor beyond control of either party significantly changes the value of the commodity. Shortages of and price increases for certain raw materials they use have can cause a reduction in production, and in turn a decrease in income. Increasing prices of raw material will also increase the price of their products, discouraging prospective buyers.[2]

Dependence on key customers

A substantial portion of PCP’s business is conducted with a relatively small number of large customers, including General Electric Company (GE), United Technologies Corporation and Rolls-Royce. General Electric accounted for approximately 14% of net sales in 2010. No other customer accounted for more than 10 percent of total sales; however, United Technologies and Rolls Royce are close to this percentage and are key customers. A financial hardship experienced by any one of these three customers, the loss of any of them, or a further reduction in or substantial delay of orders from any of them, would have a material adverse effect on PCP’s business. Due to the weak economy and lower demand for GE's products in 2010, the company bought fewer products from PCP -- as a result, PCP's sales to GE fell by 5%.[4]

Defense budget

Sales to the military sector constituted approximately 16% of 2010 sales.[5] PCP manufactures structural and airfoil castings for aeroderivative gas turbine engines which are used for military land and marine-based applications. Many of their products also go into the engines of military aircraft, and high utilization rates of the aircraft causes the need to replace parts or entire planes, creating more demand for new aircrafts increasing their sales. U.S. defense spending is subject to U.S. Congressional appropriations and to political pressures that influence which programs are funded and those which are cancelled. Reductions in defense budgets or military aircraft procurement or delays in funding will adversely affect PCP’s business.

Demand in the aerospace market

PCP’s commercial sales depend substantially on the production rates of both Boeing Company (BA) and Airbus , which in turn depend upon deliveries of new aircraft. The ultimate drivers of orders and deliveries of aircraft are underlying air travel demand, financial health of airlines, growth prospects for airline capacity, and overall economic growth. The current increase in aerospace demand is dependent on increased spending by foreign carriers and domestic airlines who must upgrade aging fleets. PCP stands to benefit from expected aircraft deliveries by Boeing and Airbus, and from the replacement cycle of aging turbines and aircraft that will be upgraded or overhauled. Any factor that adversely affects the aerospace industry (similar to the tragic events of 9/11 or the SARS travel scare) would likely pressure PCP’s operations and profitability. Bankruptcy of another airline, continued high oil prices, or the possibility of a major terrorist attack threaten to change the course of the recovery in the aerospace cycle and likely impact PCP.

Competition

PCP is the number one or two supplier in its principal markets. Because its castings use proprietary technologies and are critical to engine functionality, PCP’s customers are reluctant to seek out unproven suppliers. This conservatism shuts the door on potential new entrants; the firm's largest customer, GE, has bought Precision's castings for more than four decades. Given the limited number of competitors in each business and even fewer across the spectrum of services, PCP is less susceptible to pricing pressure than most of its peers.

Investment Cast Products segment

PCP’s principal competitor is Howmet, a subsidiary of Alcoa (AA). Howmet produces stainless steel, superalloy, aluminum and titanium investment castings principally for the aerospace and IGT markets. Howmet is capable of producing investment castings comparable to all but the largest and most complex of PCP’s structural investment castings. Howmet has the financial and technical resources to produce structural castings as large and complex as those produced by PCP, should they decide to do so. In addition, Pacific Cast Technologies (PCT), a subsidiary of Ladish Co. , manufactures large titanium investment castings for jet engine and airframe applications. Many other companies throughout the world also produce stainless steel, superalloy, aluminum or titanium investment castings, and some of these companies currently compete with PCP in the aerospace and other markets.

Forged Products segment

PCP’s largest competitors are Ladish Co. and Thyssen AG for aerospace turbine products, Alcoa Inc. and Schultz Steel Company for aerospace structural products, Vallourec Group and Sumitomo Corporation for energy products and Allegheny Technologies (ATI), Carpenter Technology Corporation, and Haynes International (HAYN) for nickel-based alloys and super-alloys.

Fastener Products segment

PCP Fastener operations compete with a large number of companies based primarily on technology, price, service, product quality and performance. Of these companies, Alcoa Inc. and Lisi SA are considered to be their leading competitors.

Notes

  1. 1.0 1.1 PCP 2010 10-K "Selected Financial Data" pg. 22
  2. 2.0 2.1 PCP 2010 10-K "Materials & Supplies" pg. 9-10
  3. PCP 2010 10-K "Products and Markets" pg. 1-6
  4. PCP 2010 10-K "Major Customers" pg. 8
  5. PCP 2010 10-K "Our business dependent on a small number of direct and indirect customers" pg. 13
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