01/06/2015 7:00 am EST
Our Top Conservative idea for 2015 is a global market leader producing castings, forgings, and fasteners for aerospace, power, and industrial markets, notes Ingrid Hendershot, editor of Hendershot Investments.
Precision Castparts (PCP) has been supplying castings for jet engines to GE, Pratt & Whitney, and Rolls-Royce for several decades. Boeing and Airbus are also important customers.
Because of the complexity of the manufacturing process and the application of proprietary technologies, Precision Castparts is one of the few manufacturers that can consistently produce large, complex structural castings in quantities sufficient to meet customers’ requirements.
This has enabled the firm to become the preferred and leading supplier of structural and airfoil casting for jetcraft and industrial gas turbine engines and to expand into the structural airframe and armament markets.
Precision Castparts generates strong cash flows with free cash flow having soared five-fold from less than $300 million a decade ago to more than $1.5 billion today.
With a solid balance sheet, PCP recently expanded its share buyback program by $1 billion, reflecting management’s confidence for future strong growth in cash flows.
Over the past five years, Precision Castparts has generated double-digit growth with sales and net income compounding at 15.3% and 17.5% annual rates.
Going forward, end markets remain strong, especially as aging aircraft is replaced in developed markets, while solid demand continues for new commercial jets in emerging markets.
Investors should consider taking a long-term flight with Precision Castparts, a high quality company, which is a profitable market leader that is generating strong cash flows and double-digit growth. Buy.