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Precision Castparts rewards growth investors who stuck with this stock pick
05/10/2013 5:16 pm EST
And those investors got their reward. The stock, which closed at $192.02 on May 8, jumped to $209.97 at the close on May 10.
Precision Castparts is a member of my Jubak’s Picks portfolio http://jubakpicks.com/ As of today, May 10, I’m raising my target price to $238 a share from my prior target of $208.
Growth investors have been so willing to stick with these shares because 1) the company’s long-term record is so good—earnings growth of 35% a year on average over the last 10 years—that the recent slump—4.22% a year over the last three years—is a clear aberration; and 2) because the slowdown in growth came as a result of key customers—Boeing (BA)—experiencing severe but temporary problems—and of key markets—the market for gas turbines in power production—going through severe cyclical slumps.
The key to the stock’s bounce over the last two days wasn’t earnings for the March quarter—although reporting earnings of $2.82—7 cents a share better than Wall Street estimates—certainly does help.
The key was the company’s description of a recovery in its end markets that let CEO Mark Donegan confidently say that Precision Castparts was on track to grow earnings per share to $15.50 to $16.50 by the year that ends in March 2016 from earnings of $9.76 for the fiscal year that ended in March 2013.
That doesn’t seem very pie in the sky when one of your biggest customers for everything from fasteners to forged parts has been Boeing. Precision Castparts said that Boeing’s build rate on its 787 Dreamliner will move from five a month now to 10 a month by the end of 2013. In 2014 and 2015 Boeing’s build rate for its workhorse 737 will step up again and the company also expects growth from Airbus’s A350 program. In 2015 and 2016 growth should step up again as the Airbus continues to increase A350 production and Boeing ramps up new programs to add more fuel efficiency to revamped versions of it current aircraft. In the quarter just finished Precision Castparts saw aerospace revenue climb 32% year over year.
Revenue growth in the company’s oil and gas, and general industrial segments lagged—but only in comparison to aerospace at 14% year over year and 25% year over year, respectively. Revenue growth like that in a market where growth has been so hard to find is likely to find a reception audience of investors.
And it looks like the company is going to generate increasing margins for the remaining quarters in calendar 2013. EBITDA (earnings before interest, taxes, depreciation, and amortization) margin came in at 25.8% in the March quarter. That will improve, Credit Suisse projects, to 26.5% by the December 2013 quarter and then to 27.2% in the March 2014 quarter.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares of Precision Castparts as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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