Like Other Industrial Cyclicals, Precision Castparts Is Looking Like a Second Half Stock
02/24/2015 9:31 am EST
This leading manufacturer of aircraft engine castings has climbed back from the disappointment over its December quarter earnings, but there’s still concern over downside guidance for fiscal 2016, so MoneyShow's Jim Jubak is cutting his target price as of February 23.
Precision Castparts (PCP) has clawed its way back, rather nicely, from the disappointment over its December quarter earnings released on January 15 (preliminary) and January 22 (final).
The company’s earnings beat Wall Street estimates by a penny at $3.09 a share (excluding one-time items) but revenue rose just 4.3% year over year to $2.46 billion, matching the Wall Street consensus.
But the kiss of disappointment came in when the company announced downside guidance for fiscal 2016 (which begins in April). Earnings for that year will be below the $15.50 to $16.50 per share in the company’s prior guidance. The big worries for the year, the company said, will be inventory destocking at a single aircraft maker (read Boeing) and lower demand from the oil and gas industry (ya think?). The days after the preliminary report took the stock down to $199 (on January 16) as a flock of analysts rushed to cut their target prices and to downgrade their ratings from outperform to neutral or lower.
From that bottom on January 16, however, the stock climbed back to close at $219.61 on Friday, February 19, a 10% gain in a month. (The shares fell 2.71% yesterday, February 23, to $213.98.)
Partly, that’s a reaction to the over-reaction by Wall Street analysts. After all, the company did say that—despite those revenue worries—earnings per share from continuing operations will show growth in fiscal 2016 over 2015.
But a significant part of it is a reaction to improving fortunes at Boeing (BA), Precision Castparts’ biggest single customer for metal parts that go into everything from engines to engine mounts to airframes. Boeing shares have rallied to an all time high on those improved prospects for aircraft deliveries and Precision Castparts shares have gone along for the ride.
Just as important, the market has started to include Precision Castparts among those industrials such as Cummins and Caterpillar that see a recovery in sales in the second half of calendar 2016. The bottom for the oil and natural gas sector now looks—to many of us—to be around mid-year; that development would certainly remove a worry hanging over the stock. The view that this might be a time to buy for a second half recovery got a boost when the end of the year regulatory filings from Berkshire Hathaway showed Warren Buffett taking his position in Precision Castparts to 2.9 million from 2.1 million shares.
The second half recovery in the oil and gas sector—in the general global economy that drives sales at Precision Castparts to the power generation sector—isn’t going to be some kind of moonshot. So, while I think you do want to own these shares for the second half of the year, I am cutting my target price to $270 by October from my previous target of $298. That would be a 23% gain. Shares of Precision Castparts are up 52.7% as of Friday’s close from my original purchase on February 1, 2011. The stock is a member of my Jubak’s Picks portfolio.