The way things have been going in the stock market, it's been hard not to make a lot of money from aerospace-related ideas. (Unless you ownGoodrich
There are plenty of cheerleaders out there to trumpet the positives of publicly traded companies, so I figure it's my job to unearth their faults. That's a little tougher with Precision Castparts, since it's exceptionally well-run. It commands good market share in most of its businesses, and it's a low-cost (or at least lower-cost) supplier with a history of strong economic returns in what ought to be a very cyclical business.
Accordingly, I can't gripe about much in this quarter's earnings report. Sales were up about 18%, operating income was up nearly 35%, and though free cash flow was down, owner earnings (my preferred tool) were up. You didn't have to look hard to find the source of the strength, either. A cyclical upswing in commercial aerospace is boosting results in cast products, forged products, and fasteners.
So what's wrong with this picture? The valuation. Yes, I know the aviation market is hot, and customers like General Electric
I have no doubt that Precision will reap benefits from the acquisition of Special Metals, nor do I doubt that it'll find additional value-building acquisitions in the fastener space. I don't even doubt that strong aerospace sales should counterbalance potentially weak industrial and auto sales for the near future.
Unfortunately, the market doesn't seem to doubt any of that, either. Between that and my cash flow modeling, Precision's shares don't seem that cheap anymore.
For more Foolish flights of fancy:
Can't bear to buy without a hefty margin of safety? Swap bargain-hunting tips with thousands of fellow value hounds with a free 30-day trial to Motley Fool Inside Value.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
