PRECISION CASTPARTS CORP.
Hugh Garside
MBA 7225 – Student Stock Market
July 8, 2014
•Overview
O
i
•Discussion of Stocks
•Valuation Analysis
•Recommendation
2
OVERVIEW
3
Overview
Sector Name
S&P 500
C
Consumer
Discretionary
11.7%
%
Consumer Staples
9.6%
Energy
11 0%
11.0%
Financials
16.1%
Health Care
13.2%
Industrials
10.6%
Information Technology
18.7%
M t i l
Materials
3 5%
3.5%
Telecommunication Services
2.4%
Utilities
3 1%
3.1%
SIM
11.3%
%
9.5%
9 1%
9.1%
14.8%
14.9%
7.4%
22.3%
3 0%
3.0%
2.8%
3 4%
3.4%
+/-0.4%
%
-0.1%
-1 9%
-1.9%
-1.4%
1.7%
-3.2%
3.6%
-0.5%
0 5%
0.4%
0 3%
0.3%
Source: Bloomberg
4
Overview
• SIM is currently 320 basis points underweight;
therefore portfolio should be balanced by
increasing the weight by roughly 300 basis
points
• Reasons to increase the weight
•
•
Industrials are cyclical and tied to a strong economy
Positive economic indicators
• Unemployment contracting
• GDP growing (recent dip due to harsh winter)
• Housing starts increasing
• Maintain diversification of portfolio
5
DISCUSSION
OF STOCKS
6
Stocks
Quantity
Security
7,000 Fluor Corp.
1 600 Precision Castparts Corp.
1,600
Corp
Unit
Ticker Cost
FLR
62.56
PCP
260 17
260.17
Total
Market Market
Unrealized % of
Cost
Price
Value
Gain/Loss SIM
437,920.00
77.93 545,510.00 107,590.00
4.2%
416 272 00 255.31
416,272.00
255 31 408,496.00
408 496 00
(7 776 00) 3.2%
(7,776.00)
3 2%
7.4%
Source: SIM
7
Stocks
Precision Castparts is the world leader in structural investment castings, forged
components, and airfoil castings for aircraft engines and industrial gas turbines.
Airbus Boeing
Airbus,
Boeing, GE
GE, Rolls
Rolls-Royce,
Royce and many other leading manufacturers
depend on us for critical airframe, engine, power generation, medical, and
general industrial components. With few exceptions, every aircraft in the sky
flies with parts made by Precision Castparts.
Castparts
INVESTMENT CAST
PRODUCTS
The world leader in
manufacturing high-quality,
complex investment castings
for aircraft engine, industrial
gas turbine, airframe, and
other applications, including
the world
world's
s largest diameter
investment cast components.
FORGED PRODUCTS
The world
world-leading
leading
producer of complex
forgings and highperformance alloys for
aerospace, power
generation, and
general industrial
applications
applications.
AIRFRAME PRODUCTS
One of the top
manufacturers of
engineered fasteners,
fastening systems, metal
components, and
assemblies for aerospace,
transportation, power
generation and general
generation,
industrial markets.
Source: Precision Castparts website
8
Stocks
Fluor is one of the world’s largest publicly traded engineering, procurement,
construction (EPC), maintenance, and project management companies. Fluor works
with governments and Clients in diverse industries around the world to design,
construct, and maintain complex and challenging capital projects.
Energy & Chemicals
Fluor is one of a few global EPC companies that
can execute
t challenging
h ll
i energy and
d chemicals
h i l
projects in remote locations around the world.
Power
To meet global demand for power, Fluor provides
EPC and plant betterment services for power
plants using coal, gas, oil, nuclear, and renewable
sources of energy.
Infrastructure
Fl or pro
Fluor
provides
ides engineering
engineering, proc
procurement,
rement and
construction (EPC) services to Clients in aviation,
bridges, commercial and institutional, offshore
wind farms, ports & marine terminals, publicprivate partnerships, rail & transit,
telecommunications, and toll roads & highways
markets.
Mining and Metals
Fluor provides a full range of engineering, procurement,
construction
t ti and
d maintenance
i t
services
i
tto th
the mining
i i
and metals industries and is one of the few companies
with the global capability and experience to execute
complex projects in remote locations.
IIndustrial
d
i l
Fluor provides engineering, procurement, and construction
(EPC) services to Clients in life sciences and
manufacturing markets. In addition, Fluor offers operational
readiness and operations
p
& maintenance services.
Government
Fluor's Government Group provides diverse services,
including EPC, maintenance, environmental remediation
and management, logistics and base operations support,
and contingency operations to U.S. and international
government agencies.
Source: Fluor website
9
Stocks
Return on Equity
2005 to 2013
S&P 500
PCP
FLR
35
30
25
20
15
10
5
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
Return on Equity Table
S&P 500
PCP
FLR
2005
16.15
2006
2007
2008
2009
2010
2011
2012
2013 CAGR
17.89
13.53
4.21
11.02
14.22
14.93
13.57
15.29 -0.68%
10.77% -24.37% -68.88% 161.76% 29.04% 4.99% -9.11% 12.68%
17.88
25.44
28.7
23.46
17.15
15.53
15.77
15.73
16.79 -0.78%
42.28% 12.81% -18.26% -26.90% -9.45% 1.55% -0.25% 6.74%
15.32
15.68
26.63
28.7
22.71
10.51
17.23
13.55
18.81 2.60%
2.35% 69.83%
7.77% -20.87% -53.72% 63.94% -21.36% 38.82%
Source: Bloomberg
10
Stocks
Precision Castparts Corp.
Analyst: Hugh Garside
6/3/2014
Ye ar
Te rminal Discount Rate =
Te rminal FCF Growth =
10.0%
4.5%
2015E
2016E
2017E
2018E
2019E
2020E
2021E 20122E
2023E
2024E
2025E
Re ve nue
% Growth
9,493
11,103
17.0%
12,832
15.6%
14,372
12.0%
16,528
15.0%
18,511
12.0%
19,437
5.0%
20,408
5.0%
21,429
5.0%
21,857
2.0%
22,295
2.0%
EBT
EBT Margin
2,544
26.8%
2,971
26.8%
3,427
26.7%
3,880
27.0%
4,462
27.0%
4,998
27.0%
5,248
27.0%
5,510
27.0%
5,786
27.0%
5,902
27.0%
6,020
27.0%
0.0%
0
0%
0.0%
0
0%
0.0%
0
0%
0.0%
0
0%
0.0%
0
0%
0.0%
0
0%
0.0%
0
0%
0.0%
0
0%
0.0%
0
0%
0.0%
0
0%
0.0%
0
0%
Taxe s
Tax Rate
839
33.0%
980
33.0%
1,131
33.0%
1,281
33.0%
1,473
33.0%
1,649
33.0%
1,732
33.0%
1,818
33.0%
1,909
33.0%
1,947
33.0%
1,986
33.0%
Ne t Income
% Growth
1,704
1,991
16.8%
2,296
15.3%
2,600
13.2%
2,990
15.0%
3,349
12.0%
3,516
5.0%
3,692
5.0%
3,876
5.0%
3,954
2.0%
4,033
2.0%
Add De pre ciation/Amort
% of Sales
Plus/(minus) Change s WC
% of Sales
Subtract Cap Ex
Capex % of sales
342
3.6%
1,121
11.8%
285
3.0%
411
3.7%
(483)
-4.4%
333
3.0%
488
3.8%
(519)
-4.0%
449
3.5%
388
2.7%
(388)
-2.7%
359
2.5%
446
2.7%
(446)
-2.7%
413
2.5%
500
2.7%
(500)
-2.7%
463
2.5%
525
2.7%
(525)
-2.7%
486
2.5%
551
2.7%
(551)
-2.7%
510
2.5%
579
2.7%
(579)
-2.7%
536
2.5%
590
2.7%
(590)
-2.7%
546
2.5%
602
2.7%
(602)
-2.7%
557
2.5%
Fre e Cash Flow
%G
Growth
th
2,883
1,585
-45.0%
45 0%
1,816
14 6%
14.6%
2,241
23 4%
23.4%
2,577
15 0%
15.0%
2,886
12 0%
12.0%
3,030
5 0%
5.0%
3,182
5 0%
5.0%
3,341
5 0%
5.0%
3,408
2 0%
2.0%
3,476
2 0%
2.0%
Inte re st
Interest % of Sales
NPV of Cash Flows
NPV of te rminal value
Proje cte d Equity Value
Fre e Cash Flow Yie ld
Curre nt P/E
P j t d P/E
Projected
Curre nt EV/EBITDA
Projected EV/EBITDA
Share s Outstanding
Curre nt Price
$
Implie d e quity value /share $
U id /(D
Upside
/(Downside
id ) tto DCF
De bt
Cash
Cash/share
15,864
25,461
41,325
7.70%
22.0
24.2
24
2
14.1
15.5
38%
62%
100%
Te rminal Value
Fre e Cash Yie ld
18.8
20.8
20
8
12.0
13.2
16.3
18.0
18
0
10.4
11.4
66,039
5.26%
Te rminal P/E
16.4
Te rminal EV/EBITDA
10.5
146.6
255.31
281.89
10 4%
10.4%
3,603
332
2.27
11
Stocks
Precision Castparts Corp.
Corp
Grow
wth Ratee
Discount Rate
9 50%
9.50%
4.00%
4.25%
4.50%
4.75%
5.00%
291.83
300.90
310.88
321.90
334.16
9 75%
9.75%
278.69
286.81
295.69
305.47
316.27
10 00%
10.00%
266.65
273.94
281.89
290.59
300.17
10 25%
10.25%
255.58
262.15
269.29
277.07
285.60
10 50%
10.50%
245.36
251.30
257.73
264.73
272.36
Min 245.36
Max 334.16
334 16
Mean 283.88
12
Stocks
Fluor
Analys t: Hugh Gars ide
7/7/2014
Te rminal Dis count Rate =
Te rminal FCF Growth =
9.0%
3.5%
Ye ar
2014E
2015E
2016E
2017E
2018E
2019E
2020E
20121E
2022E
2023E
2024E
Re ve nue
% Growth
28,583
29,873
4.5%
31,224
4.5%
32,785
5.0%
34,425
5.0%
36,146
5.0%
37,953
5.0%
39,851
5.0%
41,445
4.0%
43,103
4.0%
44,827
4.0%
EB T
EBT Margin
968
3.4%
1,009
3.4%
1,053
3.4%
1,147
3.5%
1,205
3.5%
1,265
3.5%
1,328
3.5%
1,395
3.5%
1,451
3.5%
1,509
3.5%
1,569
3.5%
Inte re s t
Interest % of Sales
0.0%
0
0%
0.0%
0
0%
0.0%
0
0%
0.0%
0
0%
0.0%
0
0%
0.0%
0
0%
0.0%
0
0%
0.0%
0
0%
0.0%
0
0%
0.0%
0
0%
0.0%
0
0%
290
30.0%
303
30.0%
316
30.0%
344
30.0%
361
30.0%
380
30.0%
399
30.0%
418
30.0%
435
30.0%
453
30.0%
471
30.0%
677
706
4.3%
737
4.3%
803
9.0%
843
5.0%
886
5.0%
930
5.0%
976
5.0%
1,015
4.0%
1,056
4.0%
1,098
4.0%
286
1.0%
(55)
-0.2%
286
1.0%
299
1.0%
(64)
-0.2%
299
1.0%
312
1.0%
(68)
-0.2%
312
1.0%
328
1.0%
(66)
-0.2%
328
1.0%
344
1.0%
(69)
-0.2%
344
1.0%
361
1.0%
(72)
-0.2%
361
1.0%
380
1.0%
(76)
-0.2%
380
1.0%
399
1.0%
(80)
-0.2%
399
1.0%
414
1.0%
(83)
-0.2%
414
1.0%
431
1.0%
(86)
-0.2%
431
1.0%
448
1.0%
(90)
-0.2%
448
1.0%
622
642
3.2%
3
2%
669
4.3%
4
3%
738
10.2%
10
2%
775
5.0%
5
0%
813
5.0%
5
0%
854
5.0%
5
0%
897
5.0%
5
0%
933
4.0%
4
0%
970
4.0%
4
0%
1,009
4 0%
4.0%
Taxe s
Tax Rate
Ne t Income
% Growth
Add De pre ciation/Amort
% of Sales
Plus /(minus ) Change s WC
% of Sales
Subtract Cap Ex
Capex % of sales
Fre e Cas h Flow
% Growth
NPV of Cas h Flows
NPV of te rminal value
Proje cte d Equity Value
Fre e Cas h Flow Yie ld
Curre nt P/E
Projected P/E
Curre nt EV/EB ITDA
Projected EV/EBITDA
5,140
8,017
13,157
4.90%
18.7
19 4
19.4
8.5
8.9
Share s Outs tanding
162.6
Curre nt Price
$
Implie d e quity value /s hare $
Ups ide /(Downs ide ) to DCF
78.02
80.92
3 7%
3.7%
De bt
Cas h
Cas h/s hare
429
2,430
14.94
39%
61%
100%
Te rminal Value
Fre e Cas h Yie ld
18.0
18 6
18.6
8.2
8.5
17.2
17 9
17.9
7.8
8.2
18,980
5.31%
Te rminal P/E
17.3
Te rminal EV/EB ITDA
8.4
13
Stocks
Fluor Corp.
Corp
Grow
wth Ratte
Discount Rate
3.00%
3.25%
3 50%
3.50%
3.75%
4.00%
8.50%
8
50%
83.76
86.33
89 17
89.17
92.30
95.78
Min
Max
Mean
70.53
95.78
81.48
8.75%
8
75%
80.02
82.32
84 84
84.84
87.62
90.69
9.00%
9
00%
76.59
78.66
80 92
80.92
83.39
86.11
9.25%
9
25%
73.44
75.30
77 33
77.33
79.54
81.96
9.50%
9
50%
70.53
72.20
74 04
74.04
76.03
78.02
14
VALUATION
ANALYSIS
15
Valuation Analysis
Absolute Values
Index/Stock
S&P 500
Precision Castparts Corp
Fluor Corp
S&P 500
Precision Castparts Corp
Fluor Corp
S&P 500
Precision Castparts Corp
Fluor Corp
S&P 500
Precision Castparts Corp
Fluor Corp
S&P 500
Precision Castparts Corp
Fluor Corp
S&P 500
Precision Castparts Corp
Fluor Corp
S&P 500
Precision Castparts Corp
Fluor Corp
S&P 500
Precision Castparts Corp
Fluor Corp
S&P 500
Precision Castparts Corp
Fluor Corp
Valuation Ratio
P i /E i
Price/Earnings
Price/Earnings
Price/Earnings
Price/Cash Flow
Price/Cash Flow
Price/Cash Flow
Price/Sales
Price/Sales
Price/Sales
Price/EBITDA
Price/EBITDA
Price/EBITDA
Price/Book Value
Price/Book Value
Price/Book Value
EV/Sales
EV/Sales
EV/Sales
EV/EBITDA
EV/EBITDA
EV/EBITDA
Dividend Yield
Dividend Yield
Dividend Yield
Free Cash Flow Yield
Free Cash Flow Yield
Free Cash Flow Yield
2004
18.41
18
41
18.19
24.23
12.44
12.11
16 02
16.02
1.58
1.47
0.47
7.82
8 29
8.29
12.12
2.91
2.44
3.45
2.49
1.96
0.48
12.34
11.05
12.21
1.65
0.18
1.17
4.86
6.82
4.24
2005
16.90
16
90
20.00
27.40
13.57
29.92
16 04
16.04
1.51
1.96
0.50
7.10
10 57
10.57
16.53
2.73
3.27
4.13
2.43
2.45
0.48
11.43
13.21
16.05
1.80
0.17
0.83
3.87
1.93
2.98
2006
16.61
16
61
17.71
27.68
16.04
12.30
23 80
23.80
1.62
2.00
0.50
6.99
9 88
9.88
13.99
2.85
3.79
4.15
2.56
2.82
0.48
11.07
13.92
13.44
1.77
0.15
0.98
3.50
6.06
0.31
2007
17.36
17
36
20.19
32.38
18.43
20.96
14 22
14.22
1.54
2.84
0.76
6.73
11 75
11.75
16.83
2.77
4.77
5.68
2.54
2.11
0.69
11.07
8.72
15.27
1.93
0.09
0.55
1.23
3.59
4.80
2008
16.32
16
32
8.00
11.53
5.61
7.52
8 18
8.18
0.91
1.22
0.36
4.95
4 78
4.78
6.77
2.00
1.74
3.05
1.47
1.28
0.28
8.00
5.02
5.28
3.15
0.20
1.11
10.42
10.84
8.47
2009
18.44
18
44
16.80
12.01
8.42
17.07
8 91
8.91
1.23
2.84
0.37
6.57
9 86
9.86
6.18
2.16
2.66
2.44
1.67
3.24
0.25
8.91
11.24
4.28
2.12
0.11
1.11
7.53
4.77
8.33
2010
18.26
18
26
19.97
18.63
8.24
19.14
21 69
21.69
1.34
3.19
0.57
6.95
11 92
11.92
15.95
2.18
2.79
3.34
1.78
3.31
0.44
9.26
12.35
12.48
1.88
0.09
0.75
7.93
4.62
2.36
2011
12.91
12
91
19.48
13.94
6.89
22.92
9 74
9.74
1.23
3.30
0.37
6.48
11 98
11.98
7.30
2.06
2.86
2.50
1.60
3.42
0.27
8.40
12.40
5.33
2.12
0.07
1.00
9.23
3.56
6.36
2012
14.10
14
10
19.33
13.19
8.39
18.92
15 62
15.62
1.34
3.30
0.36
7.14
11 64
11.64
10.37
2.14
2.83
2.85
1.69
3.74
0.27
9.00
13.19
7.98
2.24
0.06
1.09
6.82
4.13
3.81
2013 Current Average CAGR
17.10
17
10
17 99
17.99
16 76 -0.23%
16.76
0 23%
22.75
21.48
18.54
1.68%
19.44
19.25
19.97 -2.27%
9.22
9.74
10.64 -2.42%
20.83
19.65
18.30
4.96%
16 54
16.54
12 62
12.62
14 85 -2.36%
14.85
2 36%
1.68
1.75
1.43
1.03%
4.08
3.85
2.73 10.11%
0.48
0.49
0.48
0.42%
8.68
9.06
7.13
1.48%
13 22
13.22
12 47
12.47
10 58
10.58
4 17%
4.17%
9.34
9.27
11.33 -2.65%
2.58
2.73
2.46 -0.64%
3.43
3.24
3.07
2.88%
3.45
3.35
3.49 -0.29%
2.02
2.13
2.03 -1.55%
4.07
4.16
2.96
7.82%
0.40
0.41
0.40 -1.56%
10.44
11.00
10.08 -1.14%
13.21
13.49
11.62
2.02%
7.77
7.64
9.79 -4.58%
1.89
1.91
2.04
1.47%
0.04
0.05
0.11 -12.02%
0.80
0.95
0.94 -2.06%
6.92
6.49
6.25
2.93%
3.89
4.13
4.94 -4.89%
3.83
5.55
4.64
2.73%
Source: Bloomberg
16
Recommendation
17
Recommendation
•
Hold current shares in Fluor and Precision Castparts
18