Precision Castparts Corp Quarterly Valuation – August 2014 $PCP

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 Undervalued Companies for the Defensive Investor.  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 $239.67
MG Value $321.15
MG Opinion Undervalued
Value Based on 3% Growth $163.40
Value Based on 0% Growth $95.78
Market Implied Growth Rate 6.38%
Net Current Asset Value (NCAV) -$13.48
PEmg 21.27
Current Ratio 3.36
PB Ratio 2.95

Balance Sheet – 6/29/2014

Current Assets $5,730,000,000
Current Liabilities $1,705,000,000
Total Debt $3,910,000,000
Total Assets $19,475,000,000
Intangible Assets $10,638,000,000
Total Liabilities $7,686,000,000
Outstanding Shares 145,080,000

Earnings Per Share

2015 (estimate) $13.56
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

Earnings Per Share – ModernGraham

2015 (estimate) $11.27
2014 $9.66
2013 $8.27
2012 $7.43
2011 $6.76
2010 $6.28

Dividend History
PCP Dividend Chart

PCP Dividend data by YCharts


Precision Castparts qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned with the high PEmg and PB ratios.  The Enterprising Investor has no major initial concerns.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $6.76 in 2011 to an estimated $11.27 for 2015.  This level of demonstrated growth outpaces the market’s implied estimate of 6.38% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.

Be sure to check out the previous ModernGraham valuations of Precision Castparts Corp (PCP) for more perspective!

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.

Disclaimer:  The author did not hold a position in Precision Castparts Corp (PCP) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

One thought on “Precision Castparts Corp Quarterly Valuation – August 2014 $PCP

  1. Ezequiel says:

    Great read thank you and I too think PCP is a unique opportunity. The growth numbers over past 10 years are incredible! If it keeps the growth up, then it should do very well.
    Long PCP.

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