Precision Castparts in Expansion Mode

 | Jun 27, 2013 | 5:34 PM EDT
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I'm generally not a big fan of companies that are on an acquisition jag. Buying company after company can be a way to disguise faltering growth while laying up problems for the future.

But when your biggest customers say they want to deal with fewer suppliers -- and that they'll give more business to suppliers that help them consolidate their supply chain -- I say, "Go for it."

And that's exactly what Precision Castparts (PCP), a maker of forged and precision-cast metal parts and fasteners for airplane engines, airframes, and landing gear, has heard from Boeing (BA) and Airbus. The company has announced 10 acquisitions in the last year. The most recent, a $600 million cash deal for Permaswage, just reported today, June 27.

The acquisition is typical of the deals targeted by Precision Castparts CEO Mark Donegan. The company attaches a relatively small but cutting-edge specialized supplier -- Permaswage makes fluid connector fittings for the aerospace sector- -- to the Precision Castparts supply chain to give the smaller company more access to key markets. In announcing the deal, Precision Castparts said that it expects to complete the acquisition in the second quarter of 2014 and that the deal will immediately add to earnings.

(The one recent deal that breaks this mold is the company's November acquisition of Titanium Metals for $2.9 billion. That deal depends on significant synergies from improving the cost structure at Titanium and on savings from increased intra-company sales.)

In the fiscal fourth quarter of 2013 (the company's fiscal year ends with the March quarter), Precision Castparts got 67% of its revenue from the aerospace sector, and of that revenue, 75% came from the producers of large commercial aircraft. Since Boeing is ramping up production of its 787 aircraft and Airbus is pushing new aircraft to market as quickly as it can, Precision Castparts should see an acceleration from recent 4% organic growth in that part of its business.

(The company's fastest growth -- a 15% organic increase in sales -- has been in its general industrial segment, which makes up 15% of sales. The company's power segment showed flat growth in fiscal 2013 but should pick up with growth in natural gas turbine installations in 2013 and 2014.)

The only downside on the stock is that it currently trades near an all-time high. Precision Castparts doesn't fall much in your average stock market downturn, but watch for any pullback on general market weakness during the summer. The current consensus target price is in the range of $238 a share.

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