Gene Marcial's Inside Wall Street: Precision CastpartsAt first glance, Precision Castparts (PCP) sounds like an unexciting, humdrum, easily ignored company. It makes complex metal components primarily used in the manufacture of jet engines, automotive parts and industrial gas turbines -- cyclical industries that aren't exactly thriving because of the weakened economy.

Even so, Precision's stock has been a big winner, doubling in a year to $124 a share from $59 on Apr. 15, 2009. So, it wouldn't be a stretch to conclude that the stock has likely climbed to its peak. But try convincing some of its hardy fans, who now believe the stock could still go as high as $150 in 12 months -- even though some analysts have scaled back their earnings 2010 forecasts.

What else could propel the stock higher? Surprisingly, the outlook has turned sunnier in the aircraft market.

Big-Name Customers


"Precision is a major beneficiary of the airplane cycle, which is now in an upturn as more aircraft are being ordered," says Thomas Nyheim, vice president at Christiana Bank & Trust, which owns shares. In particular, Precision will gain from the uptick in orders for Boeing's (BA) 787 series aircraft, he adds. "The backlog of orders from Airbus and Boeing for delivery of new airplanes is still running high," says Nyheim.

And with Precision's ability to make high-quality aircraft parts, Nyheim says it should be assured of getting a big slice of the orders from Airbus and Boeing. He has a one-year price target of $140 for the stock. Some of Precision's key clients are major companies, including General Electric (GE), which is its biggest customer and accounts for 12% of revenues. In addition to Boeing, Precision also counts United Technologies (UTX) and Rolls-Royce (RR) as customers.

Analyst JB Groh of investment firm D.A. Davidson has an even higher price target -- $150 a share, based on 17.5 times his earnings estimate of $8.50 a share for fiscal year 2012 that ends Mar. 30, on revenues of $6.8 billion. He notes that over the past five years, the stock has traded in a range of seven to 20 times forward earnings estimates. He says that shows it's still underpriced based on its current price-earnings multiple.

For fiscal 2011, Groh forecasts earnings of $7.50 a share on sales of $6.1 billion, up from fiscal 2010 estimated $6.45 a share on $5.4 billion. In fiscal 2009, Precision did better than what's projected for fiscal 2010: It earned $7.40 a share on revenues of $6.8 billion.

Healthy Order Backlog

As production of the large new aircraft increases, so does the demand for parts and components that go into each plane. Higher output of the Boeing 787 and 777 aircraft should start boosting results in the third quarter of fiscal 2011, figures Groh. "Given the increased [component] content on these aircraft, the impact can be substantial," says Groh. "Additionally, increased production on the 747-8 program would likely kick in during the fourth quarter," says the analyst. Groh estimates that Precision's revenues per 787 aircraft would amount to $5.5 million, and $4.5 million per 777 aircraft.

The order backlog for the next six years could support current production rates at Airbus and Boeing, notes Richard Tortoriello, analyst at Standard & Poor's, who rates Precision a buy. He figures that as a result of depleted inventories in 2009 because of its customers' reduced orders, Precision's sales will likely increase in fiscal 2011, as the same customers start to restock and beef up their inventories. Tortoriello expects to see a snapback in demand not only in aerospace but also in the industrial gas turbines and general industrial markets.

It may come as a surprise to many investors that Wall Street is high on Precision despite the sluggish markets it serves. Tortoriello is only one of the 13 bulls among 19 analysts who track Precision. None recommend dumping the stock, while six other analysts rate it a hold.

Some big institutional investors are among the biggest Precision shareholders, topped by Capital Research, which owns a 6.5% stake; Fidelity Management with 4.6%; and T. Rowe Price with 4.1%. The latter purchased 3.1 million more shares as of Dec. 31, 2009.

Although Precision's stock has had an impressive run-up, it still holds promise for investors seeking a pure industrial play as the economy recovers and manufacturers gear up production. .

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