Even as Boeing
Peering into the future, CEO Mark Donegan warned that he sees no "meaningful recovery on the aftermarket or distributor front until into the second quarter of fiscal 2011." Meanwhile, "destocking" is all the rage among PCP power industry customers such as General Electric
Put it all together, and any hope for a revival of the company's fortunes appears to be six months distant -- at best.
So... is it time to cash out? Throw in the towel and call it a day? Is it, in short, time to sell PCP?
I don't think so.
Think first, then act
For one thing, the damage has already been done. News of PCP's troubles has helped shave 7.5% off the stock price. But more importantly, the same price decline that has PCP shareholders singing the blues this week ... sets the stage for beaucoup profits for investors who buy in at the new-and-improved price.
Here's why: Right now, PCP shares fetch about 16 times trailing earnings. On its face, this looks like a fair valuation, seeing as most analysts on Wall Street expect the company to post 16% earnings growth over the next five years.
And while it's true that PCP hasn't been the strongest cash generator in recent quarters, Q3 saw a revival in that regard. Even as sales slipped, management tells us that PCP generated "roughly $300 million" in cash flow during Q3, while spending about $28 million on capital expenditures. This works out to free cash flow for the quarter of perhaps $270 million -- 16% more than the company reported as its "net income."
Nor is management done with its cash generation-maximizing efforts. Declaring himself "not satisfied" with cash levels, Donegan promised to "tak[e] advantage of every single opportunity to derive value from our businesses. ... Production of the 787 at any level gives us sales upside. Any upturn in power markets ... will benefit one or more of our casting and forging operations. In addition, we are far from exhausting market-share growth opportunities across the board."
In short, management still has a lot of levers it can pull to improve performance. With a valuation that already looks fair on its face, a dominant position in its market, and the impending sales lift of a 787 Dreamliner program finally back on track, I see every reason to hope PCP will outperform going forward.