Precision Castparts Corp. (PCP)

Industry (192 industry groups) – Buy strong stocks on pullbacks in strong industries

PCP is part of the Metal Producers – Pipe / Fab / Misc industry group. This industry group has been in the top 10 industry groups for only 1 time over the past 52 weeks (week ending May 11, 2007). Today, the industry group is ranked 24th. Amazingly the industry actually stays in the top 40 industry groups consistently; however, it just can’t break into the top 10. When you break into the top 10 industries it means a lot of powerful Wall Street money is backing your industry group. It is very bullish once you hit the top 10 multiple times. Will the next few weeks prove to finally be the breakout into the top 10?

PCP is the 2nd largest market cap stock in this industry group The largest market cap stock is ACH which I recommended on April 18, 2008 and the 3rd largest market cap stock is GNA, which I don’t forsee recommending. The companies in this group vary widely in their businesses, so understanding the core business model is important.

PCP, together with its subsidiaries, manufactures metal components and products for aerospace, power generation, general industrial, and automotive markets.

Fools – Top 100 fools outperform the rest of the pack

Top 100 fools (green-red thumb ratio) like this company 11 to 0. More importantly, two of those eleven green thumbs have come in the last 90 days.

Technical – In a bear market buy the best companies most oversold, in a bull market buy strong stocks on pullbacks

PCP is about 31% off its 52 week high which is in my sweet spot (25% to 35% off) in a bear market. The stock is at 111 and there is very weak support at the 50 day moving average of 108. There is strong support at 95, the most recent low. However, if the overall market tests new lows you can be assured so will PCP.

Sales / Earnings Growth – If it isn’t growing then neither is your portfolio

Analysts show sales and earnings growth of 39% and 27% respectively which meets my minimum target of 30/20. Sales growth estimates over the last two years have been choppy and jump all over the place. However, earnings growth estimates have steadily increased. PCP’s earnings estimates have been over 20% since Sept 2006 and currently are at its highest estimate point (27%).

Fundamentals at the Craps Table in NYC

Pass Line (place a bet on this stock if you like this)
When you think PCP, you better be thinking Aerospace and Defense (53% of sales) because you are in the supply chain big time
If Aerospace isn’t sexy enough for you I am sure power generation is (21% of sales).
If you believe in the Dreamliner and that trends point towards a major cycle for this industry starting in 2009 and ramping up big in 2010
They believe they are the #1 or #2 supplier in most of their markets (the GE strategy)
Debt to equity of 23.5% is the lowest in its recent 5 year history
It has generated large amounts of positive operating cashflow the last 3 years

Don’t Pass Line (don’t place a bet on this stock if you don’t like this)
If you don’t like your revenues tied to only a few mega companies like GE (11.4%), BA (indirect – downstream) and UTX then avoid this stock
They are heavily dependent on these raw materials in their products, including certain metals such as nickel, titanium, cobalt, tantalum and molybdenum, which are found in only a few parts of the world. Think volatility of price and availability. It should be noted that they have escalation clauses in their long term contracts
13% of sales go to the military. Think Obama