Precision Castparts Ties Up Titanium Metals

When Boeing (BA -0.24%) was building the Dreamliner, it suffered significant delays in production because oftentimes its suppliers weren't on the same page. It recommended that its vendors consolidate, and thereby do it and themselves a favor, so that as plane production ramps up such conflicts won't continue. Airbus concurred that having fewer, bigger, and better financed suppliers would enable them to meet increased production schedules.

Both Boeing and Airbus are set to increase their combined production by 40%, according to Financial Times.

Apparently Precision Castparts (PCP.DL) took the advice to heart and announced a $2.9 billion acquisition of titanium parts supplier Titanium Metals (TIE.DL). The tie-up ensures Precision streamlines its supply chain and better manages its input costs.

Precision Castparts snapshot

Source: FinViz.com. N/A = not applicable

While having your primary customer urge you to take on mergers and acquisitions might be incentive enough, tax policy changes effective Jan. 1 make it likely we'll see more than a few mergers and acquisitions happen over the next few weeks, both within and without the aerospace industry. The so-called Bush tax cuts expire at the end of the year and the capital gains tax rate, unless Congress extends the cuts, will rise to 20% from 15%.

Precision is expecting its deal with Timet to close next month, but it has been on a buying spree all year long. It agreed to acquire pipe processor Texas Honing last month, and previously announced it was buying four factories from Canadian landing-gear maker Heroux-Devtek. Precision has made over two dozen acquisitions over the last 10 years.

Precision Castparts makes castings that are included in every jet engine program currently in production. It offered Titanium Metals a 43% premium to its $11.57 stock price, or $16.50 per share, that will be paid for through a combination of cash and debt. Analysts think the deal is smart because Precision was Timet's biggest customer, so it should realize significant cost savings by doing the deal. The company agreed: "... [The] potential for value creation is vast we expect to generate significant synergies by putting our two companies together and leveraging our respective strengths."

Timet's other customers include United Technologies' (RTX 0.84%) Pratt & Whitney division, Boeing, and Rolls Royce.

Paint it black
The deal comes at a good time for Timet, which just reported earnings that came in below last year's effort and well below analyst expectations. While it enjoyed higher average selling prices as titanium costs raged unchecked for much of the year, as we saw with DuPont (DD) and Dow Chemical (DOW), which are the primary global processors of titanium dioxide, prices are now starting to ease up and eat away at earnings.

That could mean the exponential savings Precision Castparts is counting on might not be as great, though they're likely to still realize major savings.

Boeing and Airbus each have about 1,500 suppliers with second- and third-tier components manufacturers comprising the mostly likely candidates for consolidation with Spirit AeroSystems (SPR -0.66%) being one name floated as a possible buyout target.

The fine print
At 15 times earnings estimates Precision Castparts might look cheap, but its enterprise value goes for 24 times its free cash flow, suggesting it's not the bargain stock it might look like. Still I've rated the aerospace engine parts supplier to outperform the broad market indexes on CAPS, the 180,000-member driven investor community where informed opinion is translated into stock ratings of one to five stars. I think it can wring those oft-pursued (but rarely achieved) synergies from this deal, but let me know in the comments section below whether you agree Precision Castparts purchase of Titanium Metals may having it casting profits in stone.