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Stock buybacks are generally considered a bullish signal on Wall Street. They return capital to shareholders, while declaring management's belief that its own cheap shares are its best return on investment. As long as profits remain consistent, share repurchases can even increase earnings per share, by dividing the same amount of earnings among a smaller pool of shares outstanding.
But don't forget -- a company isn't obligated to repurchase shares just because it announced its intention to do so. So don't use the announcement as a reason to buy by itself. Rather, use it as a launching pad for additional research.
Maybe Precision Castparts (NYSE: PCP ) is preparing for the inevitable. After reporting solid third-quarter earnings and completing its acquisition of Titanium Metals, the aerospace supplier announced a $750 million share repurchase program that will be good through June 2015. With shares bumping up against new 52-week highs, it's not as id management would consider them screaming bargains at the moment, but considering Boeing's (NYSE: BA ) Dreamliner fleet is still grounded and customers are paring back orders, the plane-building business won't look so rosy in the near future.
As has been well documented, Boeing's battery woes have led the the FAA to order United Continental to ground the six Dreamliners operated by United Airlines -- it's the only U.S airline with 787s -- as well as aviation officials around the globe grounding the entire fleet until it can be determined what's causing the battery problems in the advanced technology aircraft.
Precision Castparts, as a primary supplier to Boeing, will feel the effects if there's going to be blowback. Although the problems didn't originate with them, but rather battery supplier Yuasa, it will still suffer the consequences if Boeing doesn't get its fleet aloft soon.
A big deal
Despite being diversified across all major aircraft engine platforms from General Electric (NYSE: GE ) , United Technologies, Pratt & Whitney, and Rolls-Royce, Precision was counting on the 787 program to accelerate its sales growth. GE is its biggest customer, accounting for 15% of revenues in 2011, yet it still considers Boeing a major customer and admits that any problems arising at the plane maker, particularly with the 787, could have a material adverse impact on its own operations. I'm guessing the grounding of the fleet might be considered a problem.
No doubt part of the reason behind Precision's acquisition of Titanium Metals was Boeing's desire to have its supply lines consolidated. It said the Dreamliner suffered interminable delays in production because suppliers all too often were reading from different playbooks. If they consolidated, they'd be doing Boeing and themselves a favor, since conflicts would disappear. Airbus agreed with that sentiment, also believing that if it had a more select group of suppliers to choose from, they'd be able to more efficiently increase their production schedules.
Time to get jiggy
It doesn't hurt that Titanium Metals is a major jet-engine supplier in its own right, making the acquisition a strategic fit. Precision had worked with the titanium parts maker over the years and was familiar with the operations, so integrating the company shouldn't pose many problems, and the $2.9 billion it spent should start getting paid back right away. But Precision has been acquisitive over the past decade, rolling up almost 30 companies in the industry under its roof, and there's always risk involved in a growth-by-acquisition strategy.
At 15 times earnings estimates, Precision Castparts carries a bit of a premium to other suppliers such as Rockwell Collins, Spirit AeroSystems, and Boeing itself, but with a diversified customer base it may gain more altitude than its peers. But keep in mind that GE supplies the engines to the Dreamliner, so still getting sucked into Boeing's vortex is an all-too-real possibility.
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