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Precision Castparts Corp. (PCP - Analyst Report) reported third-quarter fiscal 2014 results with strong revenues and earnings per share from continuing operations. Net income from operations increased 27.4% to $432 million in the reported quarter from $339 million in the prior-year quarter.

The company reported earnings from continuing operations of $2.95 per share, which missed the Zacks Consensus Estimate of $3.04 by 3.1%. However, year-over-year quarterly earnings were up 27.7% from $2.31in the third quarter of fiscal 2013.

Revenues

Revenues increased 15.9% year over year to $2.3 million from $2.0 billion in the prior-year quarter, primarily driven by organic growth of 1%. The company reported strong revenue growth in two of its three operating segments, which also contributed to the top-line improvement. Revenues surpassed the Zacks Consensus Estimate of $2.5 billion.

Segment Results

Investment Cast Products revenues declined 0.6% to $609 million from $613 million reported in the year-ago quarter. Revenues increased in the segment's aerospace OEM (original equipment manufacturer) and spare sales business. The latter is associated with current commercial aircraft production rates and future ramps in aircraft build schedules.

However, the growth was almost offset by negative impacts of contractual pass-through pricing of about $2 million and weak performances of the company’s jet and military spares businesses. The segment’s operating income increased 4.3% year over year.

Forged Products revenues increased 23.2% year over year to $1,026 million compared with $833 million in the year-earlier quarter. The robust increase in revenues was driven primarily by the segment’s strong performance in the aerospace and power sectors. Also, revenues from the acquisitions of Timet and Texas Honing added to the top-line growth of the segment.

Further, Aerospace sales increased by approximately 32% year over year, driven primarily by TIMET, with stable base sales. The segment also continues to progress well in power markets. Interconnect pipe sales grew by approximately 52% year over year, with a backlog now standing at nearly one year.

All these were offset by decline in sales to the oil & gas market, which declined slightly in the third quarter of fiscal 2014, compared to very rapid growth in the same quarter a year ago. The segment’s operating income improved a considerable 51% year over year.

Airframe Products revenues surged 22.8% year over year to $722 million, compared with $588 million in the year-ago quarter. During the quarter, critical aerospace fastener sales improved marginally due to the sluggish build rate of commercial aircrafts, including Boeing 787.

The aerospace business surged 27% year over year. The increase was primarily attributed to healthy returns from new acquisitions and significant growth in the company’s organic business. The rise is expected to accelerate in near future with more acquisitions in the pipeline. The segment’s operating income increased 29.9% year over year.

Margins

Operating income surged 26% year over year to $640 million, from $508 million in the prior-year quarter. Gross margins during the quarter contracted 224 basis points (bps) year over year to 65.7%, while operating margin increased 217 bps to 27.2% driven by strong synergies from acquisitions. Profits were also driven by a strong contribution from commercial aerospace production and a stable demand for industrial gas turbine spares.

Balance Sheet

Exiting the quarter, Precision Castparts had a cash balance of $337 million, an increase of 20.4% from $280 million as on Mar 31, 2013. 

As on Dec 29, 2013, Precision Castparts had a total debt of $3,622 million versus $3,807 billion as on Mar 31, 2013. The company has a debt to capitalization ratio of 24.7% versus 28.0% as on Mar 31, 2013. Despite major acquisitions, the company has managed its debt well. Total capital expenditure incurred by the company in the quarter aggregated $85 million.

Outlook

Concurrent with the earnings release, the company provided a positive outlook going forward. The company’s business in Industrial Gas Turbines (IGT) is showing good momentum in the aftermarket services, driven by the increased demand for turbine-based power generators.

The company expects demand for its interconnect pipe (for supplying coal to India and China) to increase significantly in the next two years.  In the next couple of years, the company is also planning to introduce various new projects, like, improved retrofit designs for the OEM business and mega downhole projects for the oil and gas industry.

Precision Castparts currently holds a Zacks Rank #3 (Hold). Other stocks in the industry that are worth a look include Worthington Industries, Inc. (WOR - Snapshot Report) carrying aZacks Rank #1 (Strong Buy), Century Aluminium Co. (CENX - Snapshot Report) and CIRCOR International, Inc. (CIR - Snapshot Report) both carrying a Zacks Rank #2 (Buy). 

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