Precision Castparts Corp (PCP) Quarterly Valuation – May 2014

200px-Precision_Castparts_Corp_logo.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Highest Dividend Yields Among Undervalued Defensive Companies.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Precision Castparts Corp (PCP) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Precision Castparts Corp. (PCC) is a manufacturer of metal components and products, provides investment castings, forgings and fasteners/fastener systems for critical aerospace and industrial gas turbine (IGT) applications. It also provides aero-structures for the aerospace industry; investment castings and forgings for general industrial, armament, medical and other applications; nickel alloys in all standard mill forms from ingots and billets to plate, sheet, strip, tubing, bar and wire, as well as cobalt alloys, for the aerospace, chemical processing, oil and gas, pollution control and other industries; seamless pipe for coal-fired, industrial gas turbine, and nuclear power plants, as well as oil and gas applications; revert management solutions among others. In January 2014, Precision Castparts Corp acquired SOS Metals Inc, a provider of metal recycling services. In January 2014, the Company acquired Trans World Alloys Inc.

PCP Chart

PCP data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $240.21
MG Value $238.56
MG Opinion Fairly Valued
Value Based on 3% Growth $140.13
Value Based on 0% Growth $82.14
Market Implied Growth Rate 8.18%
Net Current Asset Value (NCAV) -$13.44
PEmg 24.86
Current Ratio 3.40
PB Ratio 3.16

Balance Sheet – 12/31/2013

Current Assets $5,345,000,000
Current Liabilities $1,572,000,000
Total Debt $3,618,000,000
Total Assets $18,332,000,000
Intangible Assets $9,961,000,000
Total Liabilities $7,297,000,000
Outstanding Shares 145,230,000

Earnings Per Share

2014 $12.01
2013 $9.76
2012 $8.45
2011 $7.01
2010 $6.50
2009 $7.38
2008 $6.89
2007 $4.45
2006 $2.57
2005 $1.80
2004 $1.18

Earnings Per Share – ModernGraham

2014 $9.66
2013 $8.27
2012 $7.43
2011 $6.76
2010 $6.28
2009 $5.65

Dividend History

PCP Dividend Chart

PCP Dividend data by YCharts

Conclusion:

Precision Castparts is suitable for the Enterprising Investor but not the Defensive Investor, as the Defensive Investor is concerned with the high PEmg and PB ratios.  The company passes all of the requirements of the Enterprising Investor, however.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors by exploring the ModernGraham Valuation Index.  From a valuation side of things, the company appears fairly valued after growing its EPSmg (normalized earnings) from $6.28 in 2010 to $9.66 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 8.18% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Precision Castparts Corp (PCP)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Precision Castparts Corp (PCP) or in any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from wikipedia; this article is not affiliated with the company in any manner.


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