High-Flying Future for Those Who Wait

12/23/2013 1:00 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

You could sell this stock, based on last week's near record-high, or you could wait, writes MoneyShow's Jim Jubak, also of Jubak's Picks, who thinks there's more upwards movement ahead.

You could sell Precision Castparts (PCP) now, because at Friday's close of $267.85, the stock was well over my most recent target price of $242. Or you could sell because the stock is just short of its 52-week high of $270 a share. Or, because the current price is an all-time high for the stock.

Yes, the US market is at all-time highs and that does produce “selling anxiety.”

But I think selling this stock here, simply because it's at highs, would be a mistake. Precision Castparts is one of the few stocks that is riding multiple trends, likely to produce growing revenue and earnings in 2014. As I read 2014, revenue and earnings growth aren't going to be all that easy to come by next year. And, given the very favorable odds that the company will actually deliver on projected growth (because growth comes from multiple trends), you're not paying an extravagant multiple (a forward PE on projected fiscal 2014 earnings of 22.1) for revenue growth forecast (by Standard & Poor's) at 17% in the 2014 fiscal year, that ends in March 2014, and 11% in fiscal 2015.

Instead of selling this member of my Jubak's Picks portfolio, I'm raising my target price to $298 by June 2014. That would be, roughly, an 11% gain in roughly six months.

So where do I think this growth comes from for Precision Castparts?

From an aggressive expansion of production at Boeing for its 737 and 787 planes, and at Airbus for its A320 and A350 planes. Precision Castparts got 65% of its fiscal 2013 revenue from aerospace sales—the company makes forged components for jet engines and fasteners for airframes. The two plane makers have finally hit the sweet spot in their product cycle and the commercial aerospace sector, as a whole, is riding a strong order cycle.

From what looks like a recovery in the industrial gas turbine business, as low natural gas prices continue to attract end-users to that fuel, and as the US economy continues to show reasonable strength.

And from significant customer wins for oil and gas drilling pipes that give the company a bigger share of the North American energy boom.

In addition to winning new business, Precision Castparts is seeing the dollar content in its orders climb, with the introduction of next generation engine and gas turbine technologies. The company estimates that, in some cases, the increase in dollar content is on the order of a two- or three-fold increase.

All this will lead to an increase in operating margins to 27.9% in fiscal 2014, Standard & Poor's calculates, from 25.8% in fiscal 2013.

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, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Precision Castparts as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund's portfolio here.

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